What are Balloon Mortgages?
Balloon Payment Mortgages in Arizona
A balloon mortgage is one of the many options available when it comes to mortgages, each intended to meet the changing requirements of the property buyers.
It can be defined as an oversized payment that is due at the end of a mortgage. This oversized payment needed at the end of the term is used to repay the remaining principal balance of the loan.
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How they work
Just like conventional fixed home loans, balloon mortgages have scheduled monthly payments which are charged at a fixed financing cost. However, this payment plan will end after a predetermined period, which is usually around 5-7 years when the remarkable balance will be due in full (balloon installment). Eventually, the home loan will serve as a long-term loan for a few years, and ten become a short-term loan.
Difference between a balloon mortgage and a traditional mortgage
With the typical fixed-rate loans, the principal loan amount with interest will be combined into monthly reimbursements that are spread over the loan term. This is known as amortization, and once you have paid it in full, the loan will be fully reimbursed, and you will owe nothing. When the entire sum of the loan is spread over the loan term, it is referred to as a wholly amortized loan.
Only a section of the primary loan will be spread over a relatively short term instead of the whole amount. This means that the balloon mortgage will just be partially amortized. The non-amortized loan section will require to be paid in one huge lump sum.
Most buyers cannot be able to handle the enormous settlement costs in a couple of years when taking out a home loan. This is in exception of a case where the buyer expects a huge pay in the time before the balloon installment is due. This makes it unpopular for most people who are looking for financing and could end up renegotiating the property purchase when the term of the loan comes to an end. In case you are not able to handle the balloon installment or to reset or renegotiate your loan, then your property will be foreclosed.
The Reset Option
It is always advisable to take a balloon payment that comes with a rest option. This is because it allows you to change over the course of the home loan into a totally amortized loan once the first loan term has ended. The lender will then have to recalculate the financing costs as well as reimbursements over the new term. Although this is a good option, it is imperative to know that it might not be the best alternative out there.
The convertible balloon mortgage with a shorthand framework is typically used in clarifying the reset alternative. For example, the reset option over a 30-year loan term can be designed in such a way as 5/25. This means that you will have five years of payments at the initially offered loan fee until the point you have the alternative to change the home loan. In case you reset the home loan, the unused balance of the loan is generally spread over the rest of the 25 years of the initial 30 and at another financing cost.
Other financing costs are determined by the current rates and could be lower or equal, and sometimes higher than the previous rate. Other alternatives have lower refinancing loan fees.
Benefits of balloon mortgage loans
Although the structure of the loan may seem complicated initially, numerous benefits which make balloon installment mortgage an ideal financing option. For example, the loan provides a low-financing cost and is perfect when purchasing property during a brisk turnover. Other benefits include:
- The loan can be changed over if need be
- Charges related to shutting are lower in most cases
- It is less complex to apply for and get approved for a balloon mortgage
- loan fees usually are more economical compared to regular home loans with fixed rates
- Not all financial lenders offer these loan contracts
- It is more likely that higher financing costs will apply when the loan is refinanced or reset
- Resetting the loan may not be as beneficial as using or renegotiating for a conventional home loan
- The property can go into dispossession if the balloon installment cannot be made or there is no reset choice available
The balloon payment mortgages were initially only open to property financial specialists. Now, they have become a popular option to mortgage holders as well. However, it is advisable to be wary of the fact that this type of home loan is not beneficial for all home buyers under all scenarios. The lower financing costs can be attractive to most but always remember that future renegotiation is not advisable. Only use a balloon mortgage payment when you have a high probability of settling the full loan sum before the end of the initial loan term.
For more information, contact our qualified Arizona experts to assist you with the best home loan type for you. Contact us today at (855) 501-5927.