Balloon Mortgages: Is it the best option?
A balloon mortgage may be a good financing option for those who want to buy their dream home, but it is not the best choice for people with other financial needs. By the word itself, balloon mortgages are like puffing air into the balloon ( loan ) until it’s big enough. Balloon mortgages let you pay an interest-only loan, in small amounts, where you will have to pay a big lump sum at the last month of your loan term. It keeps your monthly cash flow in tact for that big event, making you save more on other basic needs as well.
What exactly is a Balloon Mortgage? This is a non-amortizing loan, or a short term debt that is used on buying real estates. Traditionally, it is a loan on a 30-year fixed term. The largest amount at the end of the term that you will be paying is also known as the Balloon Payment. This means that before your term ends, you should be prepared to pay the principal amount of your purchase. Refinancing is not a good option at this point since you’ll pay higher interest rates and monthly fees because there was no down payment in the first place. In the end, a balloon mortgage offers more flexibility for your money, and which is an affordable choice that is not as complex as an ARM ( adjustable rate mortgage ).
Types of Balloon Mortgages
You can either opt for a fixed rate or a reset option when it comes to balloon mortgages. Fixed rate lets you pay in fixed terms of 5-15 years, where payment is usually amortized for a 30-year term. A reset option lets a borrower reset the remaining credit at the current interest rate. Depending on your choice, you should make a careful review of your cash flow and set a realistic time line to see if you can live up to your payment schedules. The last thing you want is have your home foreclosed.
Here are Helpful Tips in Making Your Balloon Mortgage Successful:
1. Create a system that will let you forecast your future payments and resources. You can forecast critical days that might happen before your balloon maturity date. You can make a color-coded chart.
2. Verify your balloon mortgage representative and make sure they are accredited. Think of Trust, Safety, and Communication at the negotiation stage.
3. Explore all the options you have before considering a balloon mortgage.
4. Remember that a balloon mortgage has no maximum rate protection and a huge payment will have to be made at the end. If there is a reset, the current market rate will apply.
5. Balloon mortgages rely on the current market rate and you may be quoted a lower or higher interest rate.
Plan Carefully
A balloon mortgage is great in buying the dream home that’s too expensive for you to afford right now. It can help you save money by letting you fund other important things like your children’s education, auto loan, utility bills, and many more. Plan carefully when you are considering this mortgage option so you will not end up having to sell that dream home just to pay your outstanding balance when the maturity date comes.
RESOURCES:
Lending Tree. “ Balloon Mortgage. “ 1998-2009.
http://www.lendingtree.com/smartborrower/glossary/b/balloon-mortgage/
Pirraglia, William. “ About Balloon Mortgages. “ 1999-2009. eHow.
http://www.ehow.com/about_4760549_balloon-mortgages.html
Freddie Mac. “ Balloon Reset Best Practices. “ June 2007. Docstoc.com. ( April 2009 )
http://www.docstoc.com/docs/5567675/Balloon-Reset-Best-Practices
Truthful Lending. “ Balloon Mortgage Explained. “ July 2009.
http://truthfullending.com/balloon-mortgage-explained/
