Even if you think of yourself as a fairly savvy homebuyer that knows all the different terms and mortgage types you may be unfamiliar with what a balloon mortgage is. A balloon mortgage sounds pretty great, just like a happy balloon floating in the area. And in theory, it is great…until it bursts. A balloon mortgage has similarities to an ARM mortgage but is its own separate type of mortgage loan. And, it is not inherently bad, it is great for the right borrower but it is certainly not for everyone. Similar to an ARM loan, a balloon mortgage has a fixed interest rate with principal and interest for a predetermined length of time (it varies but could be 5, 7 or 10 years). Then, at the end of the fixed period of time, a lump-sum payment of the remaining balance of your mortgage is due which means you either must pay up or refinance. Depending on the borrower this either sounds like a great idea or the most terrifying thing ever proposed.
Make no mistake; a balloon mortgage has its advantages. With a balloon mortgage you typically pay a dramatically lower interest rate. A balloon mortgage may be good for you if you know with a good amount of certainty that you will not be living in the home anymore when the lump sum is due. If you know your job has a two year contract and then you will have to relocate this option could be great for you. But just remember, if something falls through with your job you still have to deal with your balloon mortgage. Additionally, if you know you will be receiving or earning a large amount of money before the balloon payment is due this may be a great option for you because you will pay significantly less over the life of the loan than someone else might pay with a different loan. And, if you are the gambling type and feel fairly confident you will be able to refinance the loan before the balloon payment is due you may consider this loan. But, keep in mind that even the most knowledgeable mortgage lenders cannot predict what the market will be doing in 5 years, what home values will be, or what your circumstances will look like and if you cannot refinance you may have difficulty paying the balloon payment.
Balloon mortgages are not just handed out to any borrower that walks through the mortgage lender’s doors. They can be difficult to find and you will likely need to have pristine credit and meet stringent criteria to be approved. If you are considering a balloon mortgage, speak to an experienced mortgage lender who can present you with all of your mortgage loan options and discuss the pros and cons of each option so that you can make the most informed decision when financing your new home.