Gwinnett County homeowners have more than just standard home loans to consider when buying a home. It’s possible for them to get a balloon mortgage. However, before proceeding with a balloon mortgage, be sure to understand how the loan works and if it’s the right fit.
What Is It?
In short, a balloon mortgage is a type of loan that won’t fully amortize over its specified term. Often, payments made over the loan’s term only go towards interest. The final “balloon” payment is the principal balance. The name “balloon” refers to this large payment due at term’s end. The average term for this type of loan ranges between five and seven years.
What’s Amortization?
A standard loan is fully amortized. This means the last payment you would make would be the final one – to pay off the last cent you owe toward the loan. It’s like every other payment you make. When a loan isn’t fully amortized, a large amount on the loan that still needs to be paid remains. That’s why one large payment is due at the end of a balloon mortgage.
When You Should Go for a Balloon Mortgage
Homebuyers should consider a balloon mortgage for its two basic benefits: 1. It offers a lower mortgage rate and 2. A lower monthly payment.
For instance, a 30-year fixed mortgage may have an interest rate of around 4 percent. However, a five-year balloon rate for a mortgage can be considerably lower (around 2.5 percent). If you’re pursuing a loan for $200,000, for example, your payment will be much higher with a 30-year loan than it would be for the balloon mortgage – more than $150 a month difference.
Here’s another example:
If you finance $250,000 for your home with a 7-year balloon mortgage, amortized over 30 years at 5 percent, here’s what would happen:
- The monthly payment due is $1342.05.
- The balance at the end of seven years is $221,204,98.
At this point, you’d need to finance that balance with a new loan.
These perks can be very attractive. Balloon loans can serve you well if you don’t plan on staying in the home for very long. However, balloon mortgages also come with significant risks.
Balloon Mortgage Risks
The many risks associated with balloon loans include:
- Once the balloon mortgage loan term is over, you’ll need to get a new loan.
- If something happens to your credit score over the duration of the loan or if the real estate market takes a dive, you could be in trouble.
- If your home’s value drops, you’ll be left owing more on the balloon mortgage’s final payment than the home is worth.
- Interest rates may climb higher than 4 percent, and leave you stuck with a considerably higher interest rate than if you’d started with the standard loan in the first place.
Get expert advice when navigating these waters. We are happy to walk you through your mortgage options and answer all your questions. Just give us a call!
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