First-time homebuyers are often overwhelmed by the variety of mortgage loan products available. Two options to consider are balloon mortgages or biweekly payments. A balloon mortgage has smaller monthly payments that are not enough to pay off the entire balance over the term of the loan. At the end of the loan, a large payment known as a balloon payment is due. Biweekly mortgage payments amount to half of your monthly mortgage every two weeks. Below are five questions to ask when deciding among different mortgages.
Will you be moving soon?
If you plan on moving in the near future, a balloon mortgage may work best. Your monthly payment will be smaller because you will not be contributing as much principal toward a home that you will not own for a long period of time. If you sell your home before the balloon payment is due, the funds from the sale will pay down the loan.
Do you want a lower interest rate?
Balloon mortgages offer lower fixed interest rates, consistent with longer term loans. Balloon mortgages sometime provide an option for refinancing at the end of the term. The interest rate benefits, along with lower payments, are primary reasons why people consider balloon mortgages.
How much were you preapproved for?
Every homebuyer should obtain a preapproval prior to submitting an offer on a home. If your preapproval is based on a 30-year payment plan but you are looking for other options to get you into a certain home, you may want to consider the balloon mortgage. If you are approved for a balloon mortgage, you may be able to carry a smaller payment while you save money or improve your credit and then qualify for a more favorable rate through refinancing.
Do you need help budgeting?
Biweekly payment structures can help people who are paid twice each month. Similar in theory to 401K contributions, which are immediately deducted from a paycheck, a biweekly mortgage payment directs funds prior to the month’s end. This enables you to meet your mortgage requirement by drawing the funds away as soon as you are paid, before you spend them on other household items.
Do you want to build equity quickly?
A biweekly mortgage’s 26 payments each year amount to 13 monthly payments. The equity contributed with the addition of a thirteenth payment allows you to pay down your loan much faster. Conversely, a balloon mortgage contributes very little to principal until the final large payment is due and would not be a good choice for someone looking to build equity.
Before deciding on a loan, it’s a good idea to use a mortgage calculator and calculate your future payments, including interest and principal. Biweekly mortgages often charge setup fees and monthly transaction fees, so don’t forget to factor in the added costs. If you think a balloon or biweekly mortgage might work for you, speak to your lender and inquire about the different mortgage loan products currently available.
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