What is a balloon on a mortgage?

Asked by: Berry Skiles  |  Last update: September 11, 2022
Score: 4.6/5 (22 votes)

A balloon payment is a larger-than-usual one-time payment at the end of the loan term. If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could owe a big amount at the end of the loan.

Are balloon mortgages a good idea?

A balloon mortgage may be a good idea if: You know — with a high degree of certainty — that you aren't going to still be in the property when the balloon payment comes due. You expect, again with a great deal of confidence, that you're going to receive a lump sum at least equal to the balloon payment that will come due ...

What happens when a balloon mortgage is due?

What Happens When the Balloon Payment Is Due? When your balloon payment is due, you have two choices to pay it off: You can take out another mortgage for the amount of the balloon payment or you can sell your home and use the proceeds to pay it off.

Why would someone get a balloon mortgage?

Why Get a Balloon Mortgage? People who expect to stay in their home for only a short period of time may opt for a balloon mortgage. It comes with low monthly payments and a much lower overall cost, since it is paid off in a few years rather than in 20 or 30 years like a conventional mortgage.

What is an example of a balloon mortgage?

A common example of a balloon mortgage is the interest-only home loan, which enables homeowners to defer paying down principal for 5 to 10 years and instead make solely interest payments.

What is a Balloon Mortgage Loan? What's the Benefit?

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What happens if I can't pay my balloon payment?

The balloon payment is equal to unpaid principal and interest due when a balloon mortgage becomes due and payable. If the balloon payment isn't paid when due, the mortgage lender notifies the borrower of the default and may start foreclosure.

Can you pay off a balloon mortgage early?

If you want to reduce or eliminate your balloon amount, make larger payments consistently. Although a higher payment eliminates the benefit of a balloon mortgage, you will pay off the loan early. The amount you will need to increase your payment is based on the principal, interest and term.

Are balloon payments worth it?

It should not be used as an end to a means to buy a car that you can't afford to maintain. “Balloon payment deals require discipline. If a buyer is not financially savvy enough to manage cash flow and continue to save during the finance term, then a balloon deal is probably not the best option for that person.”

Is it worth paying balloon payment?

Paying the balloon payment will mean you won't have anything to repay, and you can put that money towards something else each month, or simply start saving. Even if you take out a loan to cover the cost of the balloon payment, you'll have a definitive end date in sight.

What is a typical balloon payment?

Generally, a balloon payment is more than two times the loan's average monthly payment, and often it can be tens of thousands of dollars. Most balloon loans require one large payment that pays off your remaining balance at the end of the loan term.

How do I get rid of a balloon mortgage?

We suggest talking to your servicer first and asking about a loan modification. Other, not-so-popular options include a short sale or bankruptcy. Now, depending on current interest rates, a refinance could be the easiest way out of a balloon mortgage.

How do you beat balloon payment?

You must refinance well in advance of the payment due date in order to ensure that you have the time to qualify and close the refinance. If you successfully acquire the refinance, you can kill two birds with one stone by paying the balloon mortgage off and getting a new loan with terms more suitable to you.

How can I reduce my balloon payment?

You can handle a balloon payment in several different ways.
  1. Refinance: When the balloon payment is due, one option is to pay it off by obtaining another loan. ...
  2. Sell the asset: Another option for dealing with a balloon payment is to sell whatever you bought with the loan.

What is the downside to a balloon mortgage?

Drawbacks of a Balloon Mortgage

There is a big risk associated with a balloon mortgage, though. Most homeowners who don't plan to sell their homes before the balloon payment is due expect to refinance their balloon loan to a standard fixed-rate or adjustable-rate mortgage before facing that big payment.

What are the disadvantages of a balloon mortgage?

List of the Cons of a Balloon Mortgage
  • There is a significant payment due when the balloon mortgage matures. ...
  • You will run a higher risk of dealing with a foreclosure. ...
  • Most lenders do not want to refinance balloon mortgages. ...
  • The value of your property might go down. ...
  • Most lenders will not offer a balloon payment today.

What are the pros and cons of a balloon mortgage?

Balloon Mortgage – Advantages
  • Affordable Initial Amount. First off, what attracts borrowers to take this type of loan is the low down payment. ...
  • Low-Interest Rates. ...
  • Easy To Qualify. ...
  • Future Refinancing. ...
  • Higher Foreclosure Risk. ...
  • Easy To Qualify. ...
  • Huge Payment at Once.

Can you refinance a balloon payment?

You can apply to refinance the balloon payment amount for a further period. Terms and conditions will apply. You can sell the vehicle. You can pay the full balloon payment amount and take ownership of the vehicle.

What is a 5 year balloon payment?

Balloon payment schedule

A 30/5 structure means the lender calculates your monthly payments as if you'll be repaying the loan for 30 years, but you actually only make those payments for five years. At the end of the five-year (60-month) term, you'll repay the remaining principal, or $260,534.53, as a lump sum.

What is a 7 year balloon mortgage?

A balloon mortgage is usually rather short, with a term of 5 years to 7 years, but the payment is based on a term of 30 years. They often have a lower interest rate, and it can be easier to qualify for than a traditional 30-year-fixed mortgage.

Are balloon mortgages legal?

A balloon payment provision in a loan is not illegal per se. Federal and state legislatures have enacted various laws designed to protect consumers from being victimized by such a loan.

Can a balloon mortgage be extended?

Many balloon payment lenders will extend their loan for an additional few years without any change in the loan terms. But some will ask for an increased interest rate or a partial paydown of the principal balance.

What is a 3 year balloon loan?

A balloon loan is a type of loan that does not fully amortize over its term. Since it is not fully amortized, a balloon payment is required at the end of the term to repay the remaining principal balance of the loan.

What is deferred interest on a mortgage?

What Is a Deferred Interest Mortgage? A deferred interest mortgage is a mortgage that allows the borrower to delay making interest payments on the loan for a specified period of time. This type of mortgage can mean lower payments in the short term but paying more in total over the life of the loan.

What happens when a balloon loan matures?

Pay off the loan.

For a loan with a balloon payment at maturity (this happens when the amortization period extends beyond the maturity of the loan, so the loan doesn't fully amortize over its term), the final payment may be much larger than what you've been paying each month.

What happens if mortgage is not paid by maturity date?

If you fail to pay your loan at maturity without making arrangements to refinance or extend the maturity date, the lender will declare a default. It will send a demand letter requiring you to pay the loan in full.