Balloon Mortgage Loan

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A balloon mortgage is a specific type of loan that requires home buyers to make a large payment at the end of the term. Borrowers typically make temporary monthly payments years before the remaining balance on the loan is due. Once the end of the loan becomes due, it must then be repaid.

How Does a Balloon Mortgage Loan Work

Balloon mortgages only require borrowers to make payments during a limited time period within the term of the loan. The payment period on the loan could last a few years or more but payments will cease after they reach a specific date on the loan. The payment period will vary by loan but most typically require borrowers to make payments within a few years.

For example, a 10 year balloon mortgage could require a homebuyer to make payments up to the 3rd year of the loan. After the 3rd year is completed, no more monthly mortgage payments are expected to be made. A borrower will then have to pay off the remaining balance of the loan once it becomes due in the 10th year.

Are Balloon Mortgages a Good Option for Home Buyers?

A balloon mortgage is not for everyone. As a matter of fact, many lenders do not offer them as an option for purchasing a home. However, if a home buyer is offered this option they should proceed with caution before accepting the terms of this type of loan.

On the surface, balloon payments seem like a good idea. They are attractive because they allow borrowers to make temporary payments during a specific period within the loan. However, once the loan becomes due; a borrower who does not have the money will be in hot water.

Just because a borrower does not have to make payments throughout the course of the loan does not mean that they can be financially irresponsible with its repayment terms.

Borrowers who decide to use this option to purchase a home should only use it if they truly have the funds available to pay off the large remaining balance at the end of the loan period.

Balloon Mortgage Loan Tips

Borrowers can invest monthly payments during the course of the loan that can be used to pay off the remaining balance when it becomes due. They can also save money for payments within an interest-earning account. This type of account can then be used to pay toward the remaining balance.

Borrowers who cannot pay off their balloon mortgage payment should refinance or have their lender modify the loan. If not, their property will immediately go into foreclosure. Ultimately, no one should consider using a balloon mortgage payment unless they have the financial ability now and in the future to cover all of the costs associated with this type of loan.


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