Mortgages: Pros And Cons Of A Balloon Mortgage
Mortgages: Pros And Cons Of A Balloon Mortgage
A balloon mortgage has properties of both a fixed mortgage and an adjustable mortgage. Starting out, balloon mortgages often offer attractively low interest rates that are fixed for several years, usually around 5-7 years. After this time period you will need to refinance the rest of the unpaid balance of the loan, or get another mortgage loan. You will be at the mercy of paying whatever interest rate you can get after your time period has expired.
Balloon mortgages are great, however, if you do not plan on staying in your home for very long since the first few years are generally a low interest rate and the payments are generally smaller each month. Balloon mortgages may also be a good idea if you expect your income to increase over the next few years. That way, instead of moving when your income increases, you move more into the type of home you want right away, pay smaller payments that you can afford for the first few years, and then you are left with larger payments at the end (once your income has increased) to finish paying for your home.
The risks involved with a balloon mortgage, of course, is the fact that once you refinance, or get another loan, you could be stuck with a much higher interest rate that when combined to the principle of the house, you may not be able to afford, especially if your income had decreased. If you cannot qualify for the new mortgage loan, you may be looking at foreclosure and you could lose the house. Another risk is that if you were planning on selling your house before you had to refinance again, or get another loan, if the housing market drops enough, you won't be able to sell your house without losing a lot of money.
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