Mortgage Articles – For the smart consumer

Balloon Mortgage Programs
Many first-time homebuyers choose to buy their home with a non-traditional balloon mortgage.  A balloon mortgage offers many of the benefits of a traditional 30-year mortgage, but in most cases the payments and interest rates are lower.

Balloon loans have a short loan period, usually spanning between five and ten years. At the end of that time, the loan requires either pay-off of the balance due or refinancing.  Buyers who intend to sell their home within the loan’s lifetime may find that a balloon mortgage is a good option for their situation, since balloon loans almost always offer competitive interest rates and low payments.

Historically, balloon mortgages were sometimes known as interest-only loans.  In this type of arrangement, the buyer paid all of the interest over the lifetime of the loan and the remaining balance at the end of five or seven years was the original loan principal.

Today’s balloon mortgage programs are much different than those of the past.  The loan payments are not credited only to interest, but instead the amortization schedule includes pay-down on both interest and the principal, similar to the amortization of a 30-year loan.  However, in contrast to a 30-year loan, a balloon mortgage does not fully amortize over the life of the loan.

This is why, at the end of the loan period, the borrower must either pay off the remaining balance or refinance the loan.  Should you elect to refinance, you are taking a risk, because your new loan probably will not offer interest rates and payments equal to those of your balloon loan.

The Lender Must Provide Refinancing Options
A lender who offers you a balloon mortgage must also contractually agree to offer you the opportunity to refinance the balance due on your balloon loan at the end of your loan period. 

Your Current Lender is Not the Only Option for Refinancing a Balloon Mortgage
As the end of your balloon loan term approaches, begin shopping around to see what lender programs and interest rates are available to you.  Your circumstances may have changed significantly since you borrowed your original mortgage. Therefore, it makes sense that your lender may have changed as well.  A company that already has your business should not rest assured that it will keep your business. 

Get comparison offers from other lenders and take them to your current lender. If your current lender cannot or will not meet your comparison offers, you should change lenders if you are not comfortable with the idea of absorbing the higher cost of staying where you are.

Make Your Loan Payments on Time
While this is not new advice, it is particularly applicable during the final year of your balloon loan period. This is because your lender may be able to remove the contractual obligation to refinance your loan if you make even one late payment.

Monitor Interest Rates
Another way that your lender may be able to relieve the obligation for refinance is if the currently offered interest rate is significantly higher than the rate of your balloon mortgage.  This is a sticky situation, because you want the lowest possible interest rate from the beginning, but rising interest rates can mean big payment increases should you opt to refinance.

Most lenders won’t tell you that a balloon mortgage is an excellent opportunity to build your investment portfolio. If you definitely plan to sell your home within a few years...

Is a Balloon Mortgage the Right Choice For Me?
Many home buyers ask themselves this question every day.  If you plan to move within five to seven years (the term of the loan), then this type of loan offers ideal low monthly payments at a competitive interest rate.  

If you are an investor and are purchasing a home that you expect either to sell within the life of the loan or to use as a source of income (which can be used to pay off the balance at the end of the loan) then a balloon payment might be a good option for you.

Conversely, if you intend to stay in your home for more than the five- to seven-year period, you might be better off selecting a 15 or 30-year mortgage program.  Interest rates on balloon loans are fixed, so this type of loan is similar to what you can expect during repayment of a longer-term, fixed-rate mortgage program.

Realize the Risks
While balloon mortgage programs offer many excellent incentives to homebuyers and investors, you must realize the associated risks.  If your financial situation stays the same or worsens, will you be able to refinance the balance due at the end of the loan?  Can you afford the higher payments that are a realistic part of the refinancing?  By asking yourself these questions, you will begin to understand the risks of borrowing a balloon mortgage. If you are willing to accept the potential risks in order to reap the benefits, then this type of loan program might be the right solution for you.

Ask Your Lender
Mortgage companies are great resources when you have questions about mortgage programs. While the main goal of a mortgage loan officer is to sell you a loan, he or she can also be an excellent resource for a first-time or repeat borrower with questions about current interest rates and lender offerings.

Lenders are often willing to invest some of their time to making you a more educated borrower, because they know that you are more likely to select one of their loan programs if you feel comfortable working together.

Consider a Balloon Mortgage As an Investment Tool
Most lenders won’t tell you that a balloon mortgage is an excellent opportunity to build your investment portfolio. If you definitely plan to sell your home within a few years, a short-term traditional mortgage is not necessarily the best option for you.

Even if you can afford the significantly higher payments, what are you losing in terms of your investment capability?  When you select a balloon mortgage, your payment will be significantly less and you can invest the difference in a high-performing investment.  And, since you are planning to sell your home, you should easily be able to satisfy the balance due on the loan with the sale proceeds while using your investments to make a substantial down payment on a new home.

These are just a few of the things that you should consider when thinking about a balloon mortgage for the purchase of your new home. 

If you are considering a balloon mortgage, your realtor can provide you with valuable information and maybe help you to select a specific lender who will work to meet your specific needs. Years of experience have taught realtors what to look out for when their clients’ interests are at stake.

Consider your options carefully. If you are not sure that a balloon mortgage is the best option for your situation, it might be better to borrow a different type of loan.  Many lenders are available and they offer many different types of loan programs.  If you thoroughly investigate your options, you will be sure to find the option that is right for you.