When it comes to financing your home, there is a lot of jargon that gets thrown around. There are so many different acronyms and abbreviations that they can start to blend together after a while. However, it's critical that you understand all of your options and the benefits that they bring to the table before you commit to a long-term loan. One of your options is to get a balloon mortgage, and while they are not for everyone, balloon mortgages can be very useful to some homeowners.
What is a balloon mortgage?
The basic idea of a balloon mortgage is that you take a fixed-rate loan (which has a consistent interest rate across the entire span of the loan) and reduce the duration of the loan down to less than a decade. However, each individual monthly payment will actually remain the same as they would be for a longer-term loan. This means that you will pay about the same amount per month for a fixed rate mortgage as you might pay with a balloon loan.
The big catch is that you must pay the entire outstanding balance at the end of a balloon mortgage.
When is a balloon mortgage a good idea?
Using a balloon mortgage, you can end up paying less than you would for other options. Since a balloon mortgage only lasts a fraction of the time of other loans, you will pay less in interest overall.
In situations where you can't buy your home outright, but should be able to make the entire payment over the course of 5-10 years, a balloon mortgage can be the perfect option.
Additionally, a balloon mortgage can be a valid option if you know that you are going to get a large infusion of money in the next several years, such as an inheritance. In that case, as long as you can handle the monthly payments on the mortgage, then you will likely end up paying less in the long run than you would for other mortgages.
When is a balloon mortgage a bad idea?
Unfortunately, the huge bill at the end of a balloon mortgage can be unbearable for many borrowers. If you aren't absolutely sure that you can afford the final payment, then a balloon mortgage is not the best idea.
You will need to carefully plan out your finances in order to determine the right course of action for you, and a balloon loan is not always the best idea. It's important to research all of your options when you're looking to buy a house.