A balloon payment loan is a home loan that doesn’t fully amortize at the end of the term of the loan, leaving a balloon balance at maturity. The final balloon payment is also known as a balloon payment simply because of its substantial size. Balloon payment loans are common in commercial real estate, such as real estate loans for building construction, than in residential real estate loans. There are also balloon payment loans for first time home buyers.
You cannot put a balloon mortgage into a fixed-rate or adjustable-rate mortgage program. A balloon mortgage must be repaid at the same time as the other payments, and this often means that the borrower will have to refinance the home in order to pay off the balance. The balloon payment must be made on or before the last day of the mortgage term. In a balloon mortgage, the lender or mortgage company issues a lump-sum payment to the homeowner, covering the remaining balance on the property. This lump-sum payment is typically smaller than the balance of the mortgage balance, but is still a loan.
Traditional mortgages usually provide long-term financing for a dwelling. Mortgage rates are generally lower in a traditional mortgage than they are in a balloon payment arrangement. However, balloon mortgages do present some unique mortgage benefits. For example, the interest rate can be tied to an index that is higher than the conventional mortgage; if the interest rate were to drop just a little bit, the borrower would owe less in monthly payments, yet would still owe the mortgage on an ongoing basis.
Using an amortization, loan amortization, or balloon calculator can help you determine your payments and how long you may have to pay them. These tools are very helpful in determining the amortization of your mortgage. When you enter the amortization, it will automatically recalculate your mortgage to show the amount of payments needed to pay off your debt and the total time it takes to pay this off completely. These tools are very useful for those who need to calculate their amortization; however, they should be used with caution.
Mortgage calculators can be used to help borrowers budget for balloon payments. Most commercial real estate loans have stipulations that borrowers must meet in order to make the loan obligation. Typically, borrowers must make their monthly payments over a specific period of time, which varies by loan type and location. A loan amortization calculator can help borrowers budget for their balloon payments.
Balloon payment arrangements are not always recommended, especially for short-term loans such as many used for vacations, home repairs, and business expansions. Although these arrangements may save borrowers money in the short-term, they often come with high fees in the long term. Additionally, homeowners may find themselves in a worse financial position than when they started their home loan. When borrowers take out a traditional mortgage, they are locked into the interest rate and terms for the entire duration of the loan term. With a balloon payment, the borrower has only a limited amount of time to pay off the debt and at the end of the period has to reapply for financing.
Many borrowers who take advantage of balloon loans find themselves in difficult financial situations in the future. For example, if they decide to sell their home before the amortization is complete, they may have to pay much less money than the balance of the loan. On the other hand, if they stay in their home longer, the amount of money paid for the balloon loan becomes the price they pay for owning the property. If the borrower sells their home before the amortization is completed, they may have to pay much more money than the balance of the loan.
Balloon payments should be considered for refinancing as a means to reduce monthly payments, shorten the amortization period, or get cash to make home improvements. However, they should only be used as a last resort. Borrowers should only use balloon payments if they have the ability to pay them back without delay, or they have a good enough reason to do so. Otherwise, it is best to get out of debt by using the cash available on hand or through other options such as a refinance or consolidation.