Balloon loans

In the mortgage world, balloon loans are relatively obscure. For most people’s circumstances, a fixed-rate loan is more appropriate. Still, there are certain situations when a balloon loan might help lower your home mortgage rate.

Balloon mortgages, although they carry somewhat less risk, share many traits with adjustable-rate mortgages. Furthermore, they do not require the same level of obligation. These benefits are important to borrowers, especially to those who are planning a move relatively soon after the purchase of their home.

Here are the basics: the balloon loan is divided into two main stages: the introductory stage and the payoff. During the introductory stage, which usually goes on between five and seven years, the home mortgage rate is rather low. Furthermore, the payments required each month are low. In many cases, the payment schedule is almost identical to that of a long-term, fixed-rate mortgage.

When the introductory stage ends, the outstanding balance must be paid all at once. Generally, borrowers pay the balance in one of two ways: they refinance or sell. With the first option, refinancing, the home mortgage rate typically changes according to the market. That means that with a balloon loan, your home mortgage rate could go up when you refinance. Of course, there is also the likelihood that it could also go in the opposite direction, as well.

If you are considering an adjustable-rate mortgage, or if you think you might move soon after you purchase your home, ask your lender to explain balloon mortgages in greater detail. Together, you should be able to determine whether a balloon mortgage is the option that best fits your needs and personal financial situation.