What to Know About Mortgages With Balloon Payments

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What to Know About Mortgages With Balloon Payments

What to Know About Mortgages With Balloon Payments

21 April 2021
, Blog

With all the different mortgages out there, you may have heard about a type of mortgage that has a balloon payment. If you were unsure about what these types of mortgages are, here are some key things that you need to know about them.

What Is a Balloon Payment?

Any mortgage that has a balloon payment means that you will eventually owe a very large single payment at the end of the mortgage terms. In exchange for making the large payment at the end of the mortgage, you'll see much lower regular monthly payments until that large payment is due.

Will You Know the Balloon Payment Amount?

Since the final payment of the mortgage with a balloon payment is quite large, you will know what that final balloon payment is at the time that you get the loan. This means that you are fully aware of what to expect when the terms of the mortgage are due and it won't catch you by surprise.

Why Use a Mortgage with a Balloon Payment?

There are several reasons why people may want a mortgage that uses a balloon payment. A common reason is that they cannot afford the higher monthly payment at the start of the loan, but know they will be able to in the future. For example, they may be moving into a home to start a family and the wife will be taking time off of work, but will eventually rejoin the workforce. The family would be able to afford the lower monthly payment now and easily save for that balloon payment in the future.

Another reason for a balloon payment is because the buyer can do more with their money elsewhere. With mortgage interest rates being so low, many people feel like they can invest the money in something with a rate of return that beats the rate of their mortgage.

What Happens If You Can't Afford the Balloon Payment?

A couple of things can happen if you end up in a situation where you can't afford the balloon payment. Some lenders will have in the terms of the mortgage that it will be converted to a longer fixed-rate mortgage if the balloon payment is mixed. You'll end up paying more money in interest over time than if you just got the fixed-rate mortgage in the first place. Another possibility is that the lender will foreclose on the loan. Of course, you always have the option to refinance your mortgage and get another type of loan, but it will cost you via closing fees. 

For more information, contact companies like Choice Mortgage.

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This year, I owed a tax bill for the first time ever. When I took a freelance job, I didn't realize how much I would have to pay in taxes at the beginning of the year, so I didn't put anything away to cover the bill. When I saw that I owed money this year, I had to find a way to pay those taxes to avoid further penalties. I started looking for financing options to get the cash that I needed to send the government. I wanted a loan that wasn't going to cost me a lot in interest, but one that I could get quickly enough to pay the bill before it was late. Find out how to get cash fast without paying extreme interest rates on my blog.