How to Get a Balloon Mortgage
What it is
| At a Glance | |
|---|---|
| Loan Type: | Mortgage |
| Lender: | Bank |
| Secured: | Yes |
A balloon mortgage is a non-amortizing loan and does not pay itself off at the end of the loan term. At the end of the loan's term a portion of the principal remains and comes due in a single large lump sum payment. With this type of loan, borrowers are assessed a series of equal monthly payments. After these payments have been made in full, the borrower will have to make the final large payment, called the balloon. Monthly payments are based on a 30-year amortization schedule and the loans can range from one to 25 years.
Balloon mortgages are fixed rate mortgages, but any monthly payments made will only include interest. The balance will be due after a short period of time, such as three to five years. For instance, if a borrower takes out a $100,000 five-year balloon mortgage at an annual percentage rate of 15 percent, the monthly payment will be $1,250. Each borrower must make arrangements to pay off the principal when the time comes. A second mortgage, refinancing or selling a home at its current market value are ways to pay off the balloon.
Who it's for
A balloon mortgage can be an affordable option for many home buyers. A balloon mortgage is usually rather short, with a term of five to seven years, but the payment is based on a term of 30 years. They often have a lower interest rate, and can be easier to qualify for than a traditional 30 year fixed mortgage. There is, however, a risk to consider. At the end of your loan term you will need to pay off your outstanding balance. This usually means you must refinance, sell your home, convert the balloon mortgage to a traditional mortgage at the current interest rate, or have enough cash available to actually pay off the balloon amount.
What you need to do to apply
In order to obtain a balloon mortgage, interested applicants will need to contact a local lending institution and inquire about the different options and rates available. Personal and financial history, including a credit report, will need to be made available to the lending institution. A property appraisal may also be required.