Balloon Mortgages

Balloon mortgages are sometimes the best way for a borrower to move into a home with low payments for at least the first few years after purchase, but one must be aware that at the end of five to seven years, a payoff is expected. If payoff is not possible, the homeowner must refinance, sell the home, or convert to a conventional 30-year loan at the current interest rate. For the homeowner who expects to be owning the home for a short time, balloon mortgages are a way to avoid rental property. Only home buyers who can afford the payoff in five to seven years should invest in a balloon mortgage. As in all home loans, the first payments are credited almost exclusively to interest, and very little (if any) to principal. No matter how you choose to pay for your house, put God first in the process. "In the house of the righteous is much treasure: but in the revenues of the wicked is trouble" (Proverbs 15:6).

Another type of balloon mortgage is the 5/25 type. With this type, there is a fixed rate for five years, then a new fixed rate for twenty-five years. The loan balance is due after sixty payments. These loans can be reset if the payments are current and there have been no late payments over the previous twelve months, if the borrower makes a written request within forty-five days of the last payment, and the borrower pays for a title search and processing fee. If the new interest exceeds the old one by five percent, then the borrower may not exercise the reset option. In this kind of loan, if the borrower is paying less than twenty percent down, he must buy insurance for the loan.

After checking out all the possibilities with balloon mortgages, if the borrower still thinks these loans are the most practical way to finance a home, it is important to check out the mortgage company as carefully as it will be checking out any potential borrower. For most home buyers, balloon mortgages are risky, and they will opt for the thirty-year fixed-rate monthly payment. If the homeowner actually reaches a better financial plateau, and can pay the huge chunk of money at the end of five or seven years, then the balloon mortgage may be just what he wants. However, having a predictable house note for the life of the mortgage with no further hassle is appealing to most people. For those who want it, the balloon mortgage is an option.

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