Buyers Beware If You Choose a Balloon Mortgage

by Greg Cryns

            If you’re considering a balloon mortgage, you want to make sure you evaluate the pros and cons of this type of financial arrangement before signing on the dotted line.  A balloon mortgage is a shorter-term mortgage with low monthly payments.

            The balloon part comes to play when the timeframe of the loan ends and the person has to pay a chunk of money at the end, paying off the mortgage in full.  Interest rates are generally lower with balloon mortgages, so it helps people who are in financial peril. At the end of the mortgage term when the balloon payment is due, you have 

the option of either refinancing the loan or paying it off in full.  If, during the course of the loan, your credit history has continually spiraled downward, then you may not be able to easily refinance, and then you risk a foreclosure.

            Instead of owing on the loan for 30 years or more, you’re able to pay for about 5-10 years, with the intention of making the balloon payment at the end of the life of the loan.

            Who is this type of loan good for?  Those who have their home on the market and need to go ahead and move into their new one are good candidates.  A balloon mortgage gives them the ability to make lower monthly payments (since they’ll now have a double mortgage), but once the former house sells, they can have the money needed to make the balloon payment.

            While the risk of foreclosure may intimidate you, if you really like the idea of a balloon mortgage, there are ways you can reduce your risk.  First, make sure you have conversion and reset options.

            These allow you to renegotiate the terms at the end of the balloon mortgage.  You might find out that you have to pay higher interest rates (especially if your credit isn’t polished), but you won’t lose your home because of it.

            Be aware that during the life of your balloon mortgage, interest rates could rise, and if you need to refinance, even if your credit is healthy, you might be forced to make larger payments when the balloon payment is due.

            Ask the lender to include a clause for conversion so that you have the option to convert your balloon mortgage into a traditional mortgage with a fixed rate at the end of the loan terms.  You don’t want to run the risk of having dire circumstances when the balloon payment is due and you can’t cough up the funds to cover the balance.

 

Greg Cryns is the owner of Flat Fee Real Estate Guide - http://www.flatfeerealestateguide.com