A Quick Guide to Balloon Mortgage Loans

Gone are the days when home-buyers went to the bank and got a loan with standard rates and payment plans. Now, there are numerous options to permit paying back loans on different schedules. Balloon mortgage loans are one of these options. These loans are much shorter than the traditional 30-year mortgage. Someone who gets this type of home loan would pay a fixed amount for the duration of the loan, which may be as short as five to seven years.

The borrower will not pay back the entire loan during this short time. He or she will make the same payment every month, but at the end of the loan period, most of the principal of the loan will still be owed. This money becomes due all at once.

Why, you may wonder, would anyone consider balloon mortgage loans then? Well, the first loan, the balloon loan, is a primary market loan. That means that the borrower went to a financial institution for a loan to finance the home. These institutions often “sell” balloon and other mortgages to secondary markets.

These companies pay off the balance of the loan due at the end of the balloon payments. They then offer the borrower a refinancing deal. This loan type can work for people who find that their earnings potential in five to seven years will be greater than what it is today. If you will be in better financial shape, this mortgage option may be what works for you.

Other people may continue their loan through the original lender once the balloon payments run out. In this scenario, you may be able to receive much better interest rates than when you began making payments. Many times this plan is contingent upon making your balloon payments on time every month or other factors.

In addition, balloon mortgages can allow the borrower to lock into a low interest rate at the end of the original loan period. You may be able to take advantage of a good market and then sign a loan agreement that will allow you to keep this interest rate instead of being dependent on the markets.

If you are considering this type of home loan, you will need to know if you are eligible. First, these mortgages are only available up to the conforming limit. This value changes periodically, and it is currently around $325,000. If your home is more than that amount, you are not eligible. Also, many lenders will permit these loans with little money down. You may choose to put only 5 percent down, instead of the typically 10 or 20 percent. Most lenders do not, however, permit balloon loans with combination loans. That means that you will need to have private mortgage insurance if you are not putting much down on your home.

These mortgage loans, as other types, are complicated financial agreements. You should consult your tax attorney or other professional before you make a decision.