What Is a Balloon Mortgage and How Does it Work?

A balloon mortgage is a type of mortgage that uses a portion of the home’s equity to fund a savings account. At the end of the loan term, the homeowner either pays off the loan, or the mortgage is “balloon” paid off in full. The idea is that when the home’s equity is higher, the homeowner uses the extra cash to pay down the mortgage. 

The key difference between a balloon mortgage and a conventional mortgage is that with a conventional mortgage, the lender requires a down payment to secure the loan. The borrower doesn’t need to put down any money upfront with a balloon mortgage.

 Balloon mortgages are usually used by people planning to leave their homes and move to another location. Balloon mortgages can also be helpful for people who want more space in their homes but who cannot qualify for a more conventional mortgage. 

Why Get a Balloon Mortgage? 

There are a few main reasons people might want to get a balloon mortgage. The main one is that the homeowner anticipates selling the home and moving out of the area. When someone moves, they often need to buy or sell quickly. A mortgage with a very low down payment comes in handy. The idea is that the homeowner can use some of the equity from the home to pay for the move.

Another reason people might want a balloon mortgage because they want to lower the amount of money they are paying every month. If you have a lot of equity in your home, you may be able to get a low-interest rate on your mortgage. This will lower the monthly payments and allow you to pay off the debt more quickly.

How Do You Qualify for a Balloon Mortgage?

The first question you have to ask yourself is why you want a balloon mortgage. You have to have a high enough income to cover the higher interest rate on a balloon mortgage compared to a conventional loan. The best part is that there are a few ways to get a higher income. One way is to increase your monthly expenses, another way is to get a second job, and a third way is to get a cash advance on your credit card.

Another thing to consider is the amount of equity in your home. The bank will want to see that you have enough equity in the property to cover the balloon payment. They will also want to know that you can pay off the current mortgage and still have enough income to make it through the next few years without running into trouble.

Finally, a few other things can help you get a balloon mortgage. For example, if you already have another loan with a low-interest rate, you may be able to refinance your current loan into a new loan with a lower interest rate. This will lower your payments and allow you more time to pay off your loans. Another way is by increasing income or having someone cosign on a loan with you if they have better credit than yours. 

Pros and Cons of Balloon Mortgages

One advantage of a balloon mortgage is that it allows you to buy a bigger house than you cannot afford on a traditional fixed-rate mortgage. The amortization period is usually more extended (20-30 years). This means that you will be paying less each month and have more money left over for other expenses.

The disadvantage of a balloon mortgage is that the payments are much higher than with a regular fixed-rate mortgage. The monthly payments are also due upfront. It may be hard to make your payment if your income isn’t stable or if you lose your job.

One risk is that you will need a lump sum of money at the end of the term. That could not be easy if you don’t have any savings. Another risk is that rates will go up over time, and your monthly payments will also go up.

With these disadvantages, it’s essential to consider all options before deciding on which type of loan to get. If possible, try to get some help from an experienced loan officer who can help find the best loan for your situation and advise how to make sure you stay out of trouble for the next few years until the balloon payment comes due.

How Do You Pay Off the Balloon Payment?

If you have a balloon mortgage, the best way to pay it off is to refinance it. This will lower the interest rate and give you more time to pay off the loan. In addition, if you already have an adjustable-rate mortgage (ARM) with a low-interest rate, you can refinance this loan into a new loan with a lower interest rate. You can also increase income or have someone cosign on your loan if they have better credit than yours.

Another way to pay off your balloon mortgage is by getting a second job or getting a cash advance on your credit card. However, this is not the best option because it could lead to other financial problems. In addition, you can always pay extra on your mortgage each month until the loan is paid off.

If you have a balloon payment that you cannot afford to pay right now, you should talk to your lender about your options. They may be able to give you a temporary loan that will help you pay off the balloon payment.

What Happens if You Can't Pay a Balloon Payment?

Most mortgages come with an early pay-off option, which allows the borrower to pay off their mortgage early if they become unemployed or their income drops. However, balloon mortgages do not have any leniency for payment. In other words, the payment has to be on time, every time. If you miss a payment, you will pay a penalty fee, which can easily add up over the life of the loan.

Does Balloon Payment Include Interest?

Most mortgages include interest paid by the borrower and added to the loan principal. A balloon mortgage does not have an appeal, which means that the borrower pays all of it. This can be a good thing or a bad thing, depending on your financial situation. If you have a low-interest rate loan and can pay it off early, that is a net positive. However, if you have a high-interest rate loan and can only pay it off later, that’s a net negative as well.

How Does a Balloon Loan Offer Differ From Other Loans?

A balloon mortgage is a combination of a mortgage and a savings account. The critical difference is that a balloon loan does not come with a down payment. A balloon loan is simply a mortgage where the borrower does not have to put down any money upfront. There are a few other key differences:

  • A balloon loan is shorter than a standard mortgage. 
  • A balloon loan does not come with any mortgage insurance. 
  • A balloon loan comes with a higher interest rate.

How Do I Get a Balloon Mortgage?

There are a few ways to get a balloon mortgage. One way is to shop around for rates and look for lenders that offer the lowest rates. The second way is to check out what your credit Union has available. And the third way is to check out online equity loans.

If you have any concerns or questions about balloon mortgages, Team Linda Simmons can help you today! Our experts can help you decide if a balloon mortgage is right for you.