When Would A Balloon Mortgage Work Best For You?

Mortgages come in many different types and, for this reason - not every mortgage is designed to be able to meet everyone's needs.

Balloon mortgages are certainly one of these that may not fit most people's needs, but have a great use for loans needed for just a short term. Several loan types are basically temporary loans but require a balloon payment at a specified time. Here are some situations where a balloon mortgage may be the ideal one for you.

How They Work

Balloon mortgages typically have a period in which you make fixed rate payments for a number of years, and then you are required to pay the balance in one lump sum. Usually, your payments are less than necessary for amortizing so that you can take advantage of a lower than normal payment. This lower payment makes them attractive to people who may be looking to get a larger house than what they might be able to afford otherwise.

Options At End Of Loan

At the end of the balloon mortgage term, you are required to fully pay it off. There is no way around it. Generally, this will leave you with three options. The first option would be to refinance and convert it to a fixed rate mortgage. This is probably the most common. A second option would be to sell the house before the balloon payment is due. A third option is to make large enough payments each month to fully amortize the loan by the time it is due.

Balloon mortgages may contain a clause enabling you a guarantee of being able to refinance. This will depend, however, on your own credit rating at the time, your income and outstanding debt. Many lenders also have a clause in there that will allow them to negate the guarantee if you have made one late payment in the last 12 months.

A reset clause may also be attached. These are becoming more common. This enables you to convert the loan to make fully amortizing payments at the market rate of interest for the balance of the 30-year loan. Since balloon mortgages are calculated on a 30-year basis, it would simply be for the remaining years.

Who Can Benefit?

Several different types of people can actually benefit from this type of loan. Here are some.

* People Looking To Buy Larger House

This may be a good option for those who simply want to buy a larger house - larger than what they can currently afford. Many sub prime lenders pushed this option in recent years, however, and many are now losing their homes because of it. While it can work for a while, remember that it will catch up to you and a balloon payment is due at the end, which will necessitate refinancing or selling. If you use this option, you should be sure you will have that salary increase

* People Needing House For Short Term

Since balloon mortgages can be obtained for 3, 5, 7, 11 years of more, this makes them flexible to fit your needs. If you need to move to a city for just a couple of years, then this could work good for you. Get a balloon mortgage for a little longer than what you intend to stay, and sell it before the balloon payment becomes due. Remember that short-term mortgages, however, will not provide equity.

When you look around for your balloon mortgage, you should get quotes from various lenders. This will show you what you could get in terms of interest rates, fees, and various other clauses. Watch out, though, for prepayment penalties.

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