Balloons are used for decoration and entertainment purposes in celebrations such as weddings, graduations, and birthday parties. A balloon is a mortgage that does not amortize fully and leaves a balance due after maturity. It is advisable to skip the balloons when applying for mortgages.
Balloon payments start slowly but keep blowing up to the point of bursting. When the balloon bursts, problems stack-up uncontrollably. Before considering a balloon payment, look at the following information.
What is a Balloon Payment Mortgage?
A balloon payment mortgage is the same as a regular mortgage, only that it has unpleasant surprises after maturity. It amortizes over 30 years, but the loan lasts for seven years. After seven years, the remaining balance is due immediately. The remaining loan is the balloon and can equal thousands of dollars based on the mortgage amount.
Pros of a Balloon Mortgage Payment
Some homeowners prefer a balloon payment mortgage due to the following advantages.
- The mortgage has lower interest rates due to the high risks it carries. A homeowner accepts to pay the loan after a short period. The lower the interest rates, the lower the monthly mortgage payment a homeowner makes.
- There are high chances for homeowners to qualify for a more considerable loan amount with this type of mortgage than adjustable and fixed-rate mortgages.
- This type of mortgage is profitable for homeowners who plan to stay in the house for a short period and sell before the balloon payment is due.
- People receiving commissions, bonuses, and other types of commissions besides a basic salary consider this type of mortgage with a financial plan to pay before payment is due.
Cons of a Balloon Mortgage Payment
- Although the mortgage payment is calculated on a 30-year amortization, the maturity comes within seven years. One needs to have the money in place to make the lump sum payment. Credit ratings become worse when a person fails to pay the loan making it challenging to get another.
- There’s no equity accumulation in homes since interest rates are paid off of monthly payments.
After understanding what a balloon payment mortgage is and its pros-and-cons, it’s up to an individual to determine whether it is suitable for them or not.