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Balloon Mortgages - What You Should Know



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By : Vicki Hat    99 or more times read
Balloon mortgages are great for certain situations. However, this type of loan must be understood properly before you even think of getting it. The stakes are high and without enough knowledge of what you are getting yourself into, may put your homes at risk for foreclosure.

Overview of balloon mortgages

Basically, balloon mortgage is a type of short term loan that grants borrowers a cheaper monthly amortization. Lower monthly payments are made possible because of low interest rates and the calculation is based on a 30-year term. However, the life of the loan isn't at the end of the 30th year. The outstanding balance of the loan is settled on the 5th or 7th year. This is where the borrower makes a balloon payment.

Take note: balloon mortgages are not adjustable rate mortgage (ARM). There is a huge difference. Balloon mortgages give the borrower an option to refinance while ARM may not and the rates are automatically changed depending on the economic situations.

When to get balloon mortgage

This type of mortgage is not ideal for all types of situations. There can only be few situations wherein the borrower could greatly be of advantaged in obtaining the loan. First, it is good to get this loan if you want lower monthly payments in buying a home because you are planning to resell it in a few years time. Second, you can also get this type of mortgage when you want to have cheaper monthly payments because you cannot afford it for the meantime. It can be the best option if you know for sure that you will be receiving a large amount of fortune before the life of the loan expires.

Things to watch out for

There are certain things that you have to be careful about in obtaining balloon mortgages. For one, lenders will lure you with the low interest rates and will tempt you further by offering a no down payment or interest payments only option. It may be a good idea but the future may not be bright for you as these options would not help you build any equity for your homes at all. If things do not go well for you and the life of the loan is nearing, you may not be able to refinance and you may get stuck paying a huge amount of money when you still cannot afford it.

Do not also go on risking getting a shorter life term. Even if you are certain that a huge amount of money is coming your way, you still have to be smart about it. Stick with the usual terms. After all, you can still refinance later on. The important thing is you have enough time to build equity.

Evaluate

Before getting this type of loan, one must evaluate their current financial situations. If you are lured to get balloon mortgage but you are scared of its effects to your finances, then talk it out with your financial advisers. This way you will have a better understanding of the benefits and the risks involved in this type of loan.


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