The Risks and Benefits of Balloon Home Loans

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Expert Author Dave Moller

Different situations call for different solutions. The ultimate goal is to find the type of loan that addresses personal demands. A balloon home loan is one that might just be the right choice for you.

A balloon home loan is a short-term mortgage with a fixed monthly payment and interest rate. The monthly fees are relatively small, and after a period of ten years or so, the remaining amount (which is comparably large, hence the name "balloon loan") needs to be paid in one huge lump sum. If the loan matures and the debt cannot be settled, there is the option of refinancing the said amount. Refinancing in itself entails several risks, for the rates will now be set according to current interest rates, eventually leading to higher loan payments in the long run.

For many, obtaining a balloon home loan is a very precarious decision. Things may go smoothly for five years or so due to the small amounts to be paid, but as the loan matures, not everyone will be completely sure they will be able to pay the remaining balance in full. For example, if one obtains a five hundred thousand-dollar loan, and at the end of the term was only able to pay fifty thousand, it might come as a shock to know that four hundred fifty thousand dollars need to be paid in lump sum. It is for this reason that balloon loans do not appeal to all types of money borrowers.

This type of loan, however, can be advantageous to people who buy and sell homes, for instance. They are able to get huge sums of money in one single business transaction, thus the low rates are certainly to their benefit. Another advantage is the fixed-interest rates, which are found to be even lower than those of adjustable rate mortgages.

A good guiding principle would be the following: balloon homes are intended for short-term financing, thus if you are planning to sell your home before the loan matures, or you are certain of being able to pay the lump sum, obtaining a balloon home loan would be beneficial. If you plan to hold on to the property for a long period of time, there is a risk of refinancing, which might turn out to be a nightmare due to higher interest rates. An even graver consequence is that you might not be able to pay the new loan, and end up losing your home and property entirely. Thus if you're looking for a more stable, long-term mortgage loan, it would be better to seek other types of home loans. Important things to keep in mind when applying for a balloon home loan are the interest rates, the due date of the lump sum, the outstanding balance, the option of refinancing, and effective management of installment payments.

Ultimately, choosing the right type of loan depends on individual circumstances. Each type of loan has corresponding risks and benefits; it's just a matter of finding the appropriate one that suits your needs.

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