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Balloon Mortgages
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Balloon mortgage is a lump sum principal payment due at the end of some mortgage or other long term loans. It is an amount payable in full after a period shorter than the term. It is therefore a balloon that has to be repaid or refinanced. It is usually a greater amount than the regular monthly payments. It may be a very large payment. It is designed to be paid when the regular payments do not pay off all the interest and principal owing on the loan over all the term of the loan.
These mortgages are offered for short terms usually 5 to 7 years. The payments are based on what one would pay for a 30 year plan. For example, if the term of a balloon mortgage is six years, payments are estimated as if the mortgage is for 30 years. It has a low monthly payment with a large final large payment due at the end of the term. The low payments in the early months make it easier to get started with at a new home, helping one to meet the extra expenses at the new house. The basic instinct for you to go for a loan is to have a home for which currently money is not available with you. The balloon mortgage makes that dream further close by requiring you to pay only a small amount for a few years. The main advantage of a balloon mortgage is that you only have to pay lesser amount for some years. Lower amortization and fixed interest rates are the other attractions. However, you may have to pay a higher down payment in case of a balloon mortgage. Another disadvantage is that you would at times be bogged down on thoughts of a large due on the payment front. And make no mistake about it; if you've obliged yourself to a balloon mortgage, there is a small amount of risk involved. Needless to say, this depends on your financial status at the end of the first five or seven years according to the term of your loan.
Most typical balloon offers are 7/23 and 5/25. In case of 7/23, the rate is fixed for seven years and then it changes to another fixed rate for the remaining twenty three years. The loan is practically transferred into due status after eighty four months. There is a provision to reset the loan if some conditions are met. In the same way, for a 5/25 balloon offer, the rate is fixed for five years and another rate comes into being after five years. In both cases, the loan gets completely amortized only after thirty years.
At the end of the term, some balloon mortgages offer the option of extending the same mortgage for the remaining thirty year period. Payments are based on the rates at that particular time. If your budget does not allow you to go for a large monthly payment for some more years, balloon mortgage can be the finest option.
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