Balloon Mortgages

The balloon mortgage gets its name from the fact that the payment amount expands after a certain fixed period of time. This time period can be as short as five years or as long as ten. These mortgages are essentially the same as a normal fixed-rate mortgage with the exception of the balloon payment due at the end of the term.

If you are considering a large balloon mortgage, be sure to check with your lender to determine when the final balloon payment will come due. Be especially sure that you understand how the balloon mortgage terms affect your interest rate.  It’s a good idea to compare available fixed-rate mortgages with the balloon mortgage in order to determine which option is best for your situation.

Most people choose a balloon mortgage because they are looking for a way to keep initial payments low. They are usually expecting to be able to refinance the mortgage before the balloon payment is due because of an anticipated increase in income that is expected to arrive before the balloon payment date.

But things frequently change in life. So make sure you have a backup plan that includes the fact that you may not receive that anticipated income, or that interest rates may be substantially higher when it comes time to refinance.

Be aware that if interest rates shoot up 5% or higher from the time you first lock in your interest rate, your lender may want to take a look at your credit and income again. A serious change in your condition may nullify the lender’s commitment to help you refinance later. This may result in your having to come up with a lot of money to cover the balloon payment or to continue making monthly payments beyond the balloon date, if that is an option. Make sure you understand all of the reasons that a lender may disqualify you for refinancing before you sign.

If you are planning to stay in your home for a relatively short period of time before selling it and moving on, a balloon mortgage may be ideal for you. Just don’t forget that you are taking a risk that the mortgage or housing market may not be where you need it to be when it comes time to sell.

Protect yourself by having a good plan in case the unexpected becomes reality.