A balloon payment mortgage is a loan type that allows you to pay off the balance in one lump sum at the end of its term. This mortgage could be ideal for those who anticipate having substantial extra funds come in before their final repayment is due.
Interest rates are lower
A balloon payment mortgage is a type of financing with lower monthly payments than traditional amortizing loans, but also has an oversized payment due at the end of the loan term.
Commercial real estate transactions often utilize this type of financing, such as purchasing a new business property or renovating an existing one. Unfortunately, it may not be the most suitable option for residential purchases due to its stringent qualification requirements.
Although balloon mortgage interest rates may be lower than other loan types, these investments still carry significant risks. Therefore, borrowers must ensure they can afford them.
You can buy a home sooner
If you’re expecting a significant income boost or lump-sum payment, a balloon mortgage could help you buy your home sooner. These loans typically feature low monthly payments for an established period of time – from three to ten years – at low rates.
If you plan to sell your home before the balloon payment is due, the proceeds from the sale could be applied towards paying off your loan balance. However, this approach could prove challenging as you would need to make a substantial final payment that could amount to several thousands more than regular monthly payments.
Another option is to refinance your mortgage. Unfortunately, this won’t grant you an extension and requires going through a new underwriting process and paying fees.
You can focus on other goals
One of the greatest advantages of a balloon payment mortgage is that it gives you extra time to focus on other important financial goals. You could, for instance, use that extra cash towards saving up for a home purchase or building your credit score; either way, you’ll have better odds at paying off your house in a timely manner.
A balloon mortgage is the ideal solution for homeowners who want to own their home sooner rather than later. Making the most of your investment and enjoying its rewards over time are key considerations when selecting a home loan type that works best in your situation. Consulting with an expert real estate agent is recommended in order to ensure you select the appropriate loan that meets both your needs and budget.
You can negotiate an extension
If your mortgage has a balloon payment due soon, there are several ways to delay it. One option is negotiating an extension.
Another option is to refinance your loan into a shorter-term mortgage, which would enable you to pay off the balloon payment sooner and completely eliminate it.
You could potentially avoid making the payment if you have enough equity in the property, but this option comes with risks as you might not be able to sell it before the due date.
Should your situation deteriorate, you may need to refinance with a long-term loan in order to pay off the balloon payment. This process involves lots of paperwork and could take longer than anticipated for your original loan.
You can refinance
In certain scenarios, you may wish to refinance your balloon payment mortgage. For instance, if you anticipate a large income boost after graduating law school or planning on making a significant lump-sum payment down the line, it would make financial sense to do so before the balloon comes due so as not to have to pay an excessive amount all at once.
Be mindful that a refinance may come with a higher interest rate than expected and you could also have to pay closing costs.
If you are worried about the risks associated with a balloon mortgage, there may be other loan alternatives worth exploring. Government-backed options like FHA or VA loans can help reduce upfront costs associated with home ownership while offering lower monthly payments with better terms.