In many ways, balloon mortgages are similar to fixed rate mortgages. The payments are both calculated in the same way and the payment is the amount required to pay off the loan over the standard 30 years. A balloon mortgage is a type of home loan where the balance is paid in full at the end of the term.
A 5 year balloon mortgage may be amortized over the course of 30 years, but the balance would be due in full after the initial 5-year period was up.
There are many advantages to getting a balloon loan. These mortgages typically come with no down payment. This is beneficial to buyers who don’t have the money for the down payment on hand, but expect to collect a large sum in the future, or buyers who want to sell before the loan matures. Many buyers who plan to move before the balloon period will end often prefer balloon loans over adjustable rate mortgages.
The payments on balloon mortgages are much lower and the interest will typically be low as well. These loans are low risk for lenders due to the fact that most mature after 5 years and the balance left on the mortgage can be refinanced when the loan is up.
There are heavy risks involved with balloon loans. One of the least attractive features of these mortgages is the large “balloon” payment due at the end of the loan. This is a significant financial obligation for mortgage holders. Many borrowers may have difficulty raising the money which can lead to refinance or foreclosure.
There are new mortgage guidelines that have been in effect since January of 2014 that help protect borrowers. These changes were intended to protect lenders and borrowers from common pitfalls. The most well-known guideline is known as the “qualified mortgage rule.” All lenders are required to follow guidelines to ensure that the borrowers are not getting loans they can’t afford. Balloon mortgages usually meet qualified mortgage standards, but could also be considered a risky feature in a mortgage loan.