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Is A Balloon Mortgage Really What You Want?

Aug 18, 2007
In these days of hustle and bustle, and everybody just generally being in a hurry, it is also true that you can get a mortgage that way, too. But the speed and the rush that may surround your getting a mortgage for that home that you wanted, may also have prevented you from finding out what you really got yourself into. Balloon mortgages are becoming more common, but are they as good as some claim? Here are some things you need to know about balloon mortgages before you sign your name to one of these contracts.

Like other mortgages, a balloon mortgage is taken out for 30 years. One difference, though, is that it never fully amortizes. Typically, they will be required to be paid in full after only 5 or 7 years, but some also go for as long as 15. Like a regular mortgage, the payments are based on the 30-year period in order that the payments would be the same.

The difference comes in the "balloon" part. Just like balloons are large and can suddenly get in your way, so is a balloon mortgage. At the end of the 5, 7 or 15 years, when it becomes due, you owe the entire balance. Since most people cannot afford to hand over such large sums of money in such a short time, the mortgage will need to be refinanced, or you could sell the house in advance, or lose the house.

There is a guarantee, usually, in the contract stating that you can refinance. While this should provide a degree of comfort, you need to realize that if you refinance only when it is due, then you may be stuck with whatever the interest rate is at the time. It could be much higher, and your monthly payments much larger, too. In reality, though, the lender may not refinance if you just fail to be on time with even one payment in the last year before refinancing. If the interest rates, are high, you may not want to refinance. In either case, you risk losing the house.

Another problem is the amount of equity that you will have after the 5 or 7 year period. There will not be much equity built up, and that could leave you with a very bleak future because, even if you sell the house, you may not get enough for a serious downpayment on another one.

If you plan on living there for any length of time, you are probably much better off with regular financing. One great advantage is that you can pick and choose a time when interest rates drop to be able to consider refinancing if you want, rather than being stuck on whatever the rates are when you must refinance. Besides that, you have a greater level of security for yourself and family in knowing that the rates are secure (unless you get an ARM).

A balloon mortgage does have a good customer, though, for someone who knows that they will not stay in an area but for a few years. The steady payments gives them an opportunity to have a house, reasonable payments, and will allow them to sell in time to be able to be able to avoid having to refinance in order to keep the house.
About the Author
Joe Kenny writes for Rebuild.org, offering mortgage loan offers, or if your UK resident cheap UK mortgages or submit your details for the best mortgages on the UK market.
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