![]() A borrower can’t qualify for a long-term, fixed-rate loan because their income fluctuates.Two prime cases where balloon mortgages make sense are: But, in some cases, a balloon mortgage is the best option. They’re considered much riskier mortgage products for borrowers-and many lenders don’t even offer them because they leave borrowers owing large lump sums that they may not be able to afford without taking out a new loan. Who Should Get a Balloon Mortgageīalloon mortgages aren’t right in all cases. ![]() So, at the end of the five-year loan term, the borrower would be left with a remaining balance of $177,160.38, which they would be required to pay in one lump sum. However, this loan ends after just five years. If the borrower made those payments for 25 years, then the loan would be completely repaid. Sample Balloon Mortgage Payment ScheduleĬonsider the following example based on a $200,000 balloon mortgage, provided at 5% with a five-year term and a 25-year amortization:Īccording to the schedule above, the borrower would make regular monthly payments of $1,169.18. ![]() Borrowers will need to go through a whole new underwriting process, pay fees and possibly get new appraisals or inspections. However, it’s important to note that this is a new loan-not an extension. More often, though, balloon payments are refinanced. Many homeowners who purchase property using balloon mortgages make extra payments over the term of their loan in order to minimize their balloon payment or eliminate it altogether. Of course, all of this assumes the borrower doesn’t make so many extra payments that they pay off the entire balloon ahead of time. Using the example above, at the end of the five-year loan term, there would still be a balance outstanding on the loan, and the borrower would need to pay it off, either in cash or with the proceeds of a new loan, effectively refinancing the loan. This leaves a balance remaining at the end of the loan term, which the borrower has to repay in one lump sum. In this scenario, the loan will only last for five years, but the amortization schedule anticipates 25 years of payments. Usually, these payments are structured using a normal amortization schedule, just like a conventional loan, but the amortization schedule is longer than the loan term.įor example, a borrower might get a five-year loan with a 25-year amortization. When a lender issues a balloon loan, the loan includes monthly payments that are based on an underlying schedule. In other cases, lenders simply don’t want to provide loans for long terms, sometimes due to the riskiness of the loan, the creditworthiness of the borrower or the dollar value of the asset being financed. In some cases, balloon mortgages can give borrowers access to lower interest payments or interest rates than they’d otherwise get with a long-term loan because short-term balloon loans are less risky for lenders. The borrower simply refinances the loan-sometimes using the same lender. In practice, most balloon payments are paid off with the proceeds of a new loan, rather than with cash. Using these characteristics, the lender calculates the regular monthly (or quarterly) payments to be made by the borrower, as well as the remaining balance that will be owed at the end of the mortgage. Like any other loan, all balloon mortgages contain certain common characteristics, including: This leaves a balance due at the end of the loan term, which the borrower is required to pay. In financing terms, balloon mortgages are not “fully-amortized.” In other words, these loans are structured with monthly payments that would have them paid off over a period of time that is longer than the actual term of the loan. Then, at the end of the term loan, a loan balance remains, which borrowers have to either pay off or refinance. Instead, balloon mortgages are issued for set periods of time, with low monthly payments that may cover just the interest accrued. What Is a Balloon Mortgage?Ī balloon mortgage is a type of loan that isn’t structured to be paid off through normal monthly payments alone. But, while they often aren’t ideal, they’re sometimes the best option available when long-term financing isn’t an option. These loans aren’t often used for consumer financing. Instead, with a balloon mortgage, a considerable portion of the loan amount is due as a single lump-sum payment at the end of the loan term. Balloon mortgages are loans that aren’t completely paid off when the loan ends.
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