Mortgage Financing Information: Balloon Payment Mortgage
One type of home mortgages that is available today is the balloon mortgage otherwise known as a partially amortized loan. It is referred to as a partially amortized loan because your liability is only partially amortized. This means that the rest of the amount you owe needs to be made in one large payment at the end of the term. This is called a balloon payment. You are trading getting low interest rates and monthly payments in exchange for owing a large amount at the end of your loan period.
With regular mortgage loans monthly payments are contributing towards paying interest as well as the principle amount borrowed. However with a balloon payment mortgage loan your monthly payment only covers the interest or perhaps a very small amount of the principal. Then when the term expires the buyer is responsible for paying the balance in full. The more you pay each month to bring the principal balance down the less you have to pay as a balloon payment in the end.
Many of the balloon payment mortgages are actually second mortgages taken out on a home. Some people will take out a second mortgage to use the money to invest. If you take out a $20,000 balloon payment mortgage with a ten year term then you only pay the interest on it every month for ten years. After ten years you need to pay the $20,000 principal amount.
Many people choose to do a thirty year balloon payment mortgage that needs to be paid off in five or seven years. If you do this you will generally get a lower interest rate than you would for a normal 30 year fixed rate. Your monthly payments are amortized on a 30 year term, but at the end of five or seven years you will owe a balloon payment.
If you are considering getting a balloon payment mortgage you need to be sure that the due date is not in the near future. You need to have time to get the money to pay for the principal balance. If you cannot come up with your balloon payment when it is due then the lender may foreclose your property. However, some lenders may give an extension for the 30 year loan that is due in seven years. You may be able to extend your balloon payment for 23 years. However, you will be given a new interest rate. This requires you to re-qualify for the balloon payment mortgage if the new interest rate is much higher.
If you are considering getting a balloon payment mortgage then you need to take into consideration all the risks and benefits. Surely low payments now sounds really great, but you need to also be able to afford the balloon payment when it comes due.