A balloon mortgage provides you with a fixed interest and principal payment for a fixed period of time. The interest rate usually is lower than on a fixed mortgage, and therefore, your monthly payments will be lower. After the initial repayment period is concluded, a lump sum is due and owed to the lender to pay off the remaining mortgage amount.
How will a balloon mortgage benefit you?
You will be able to make lower mortgage payments for a period of time and avoid foreclosure on your home. Balloon mortgages may be useful if you are expecting a large sum of money that can be applied to the lump sum in the future. The lump sum also may be refinanced when it becomes due.
Is there anything that you should be concerned about with a balloon mortgage?
Yes. Some things to consider include:
- How will you pay the lump sum when it comes due?
- The interest rate at the time of the refinancing of the lump sum may not be as low as it was at the time of the initial loan.
- How will you pay the costs associated with refinancing?
- Does your loan have a pre-payment penalty? The typical cost of a pre-payment penalty on a balloon mortgage can equal up to six months of payments. You should note, however, that some states have laws preventing these penalties.