Your balloon mortgage loan might have seemed like a good idea when you first applied for it. Maybe it meant that your monthly mortgagepayments have been lower so they fit into your budget. But now your mortgage balloon payment is due and you can’t afford to make it. Before you start panicking, it’s important to keep in mind that you do have some options.
A financial advisor can help you create a financial plan for your mortgage needs.
What Is aBalloon Mortgage Payment?
A balloon mortgage comes with an unusual twist. You make normal monthly payments for a set period of time (usually five to seven years) and then you have to make one large payment to cover the remaining balance of the loan. That large payment is the “balloon” part of a balloon loan. And depending on the size of your mortgage, that payment can be tens of thousands of dollars.
Say you took out a balloon loan of $100,000 with a term of five years andan interest rate of 6.00% amortized over 30 years. Because you are not paying off the loan for that full 30 years — indeed, you’re only making payments for five years — you’d owe almost $93,700 after 60 months’ worth of payments. This, unfortunately, would come in the form of a lump sum payment. To get a better sense of your payments, check out ourmortgage calculator.
Advantages of a Balloon Mortgage
Balloon mortgages should come with a lower interest rate than either fixed-rate or adjustable-rate mortgages, making them a cheaper loan for the right consumers.
Those consumers who plan to live in a home for only a short period of time, might do well to take out a balloon mortgage. Say they plan to move in three years. They can take out a five-year balloon mortgage at a lower interest rate and then sell their home long before that massive balloon payment becomes due.
This can also be an option for people who gets large bonuses but a more moderate salary. A balloon loan would allow the monthly mortgage payments to fit into their budget, and then they could use the larger yearly lump sums toward the balloon payment.
Drawbacks of aBalloon Mortgage
There is a big risk associated with a balloon mortgage, though. Most homeowners who don’t plan to sell their homes before the balloon payment is due expect to refinance their balloon loan to a standard fixed-rate or adjustable-rate mortgage before facing that big payment.
And that is often the best move if you can’t afford your balloon payment: Refinance your loan before you have to pay up.
But what if your home has lost value since you bought it? What if you are underwater on your home loan, meaning that you owe more money on your mortgage than what your residence is worth?
It’s not easy to refinance a mortgage loan with negative equity. Most lenders require that you have at least 20% equity in your home before they’ll approve your request for a refinance. You might be able to refinance through HARP,but you have to meet certain requirements to refinance through this program.
What to Do If You Can’t Refinance
If you can’t refinance, can’t or won’t sell your home and can’t afford your balloon payment, what are your options?Your best move is probably to call your existing lender as soon as you realize that you can’t cover your balloon payment. Your lender might offer to extend your existing loan for another few years before another balloon payment looms. That would give you more time to pay off some of what you owe and hopefully build positive equity in your home. You might then be able to refinance your loan.
Your lender might also allow you to refinance your loan on its own. You lender might see this as a better option than having to take your home through the foreclosure process. But what if your lender isn’t willing to negotiate? Then you might face the unhappy prospect of losing your home to foreclosure.
Tips on Saving for a Home
- A financial advisor can help you reach your home buying goals with a financial plan. SmartAsset’s free tool matches you with up to three financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Before you even consider buying a home, you should know what you can afford to spend on one. SmartAsset’s home affordability calculator can help you get an estimate based on marital status, household income, the size of your down payment, how much you pay per month towards debts and where you want to live.
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FAQs
For most people, taking out a balloon payment mortgage is a pretty big risk. Even if you have a plan to refinance or sell before the final payment is due, the market could change and make those options impossible.
Do balloon mortgages still exist? ›
These days, most mortgages are 15- or 30-year loans with fixed interest rates. But balloon mortgages still exist. In this article, we'll take a closer look at what a balloon mortgage is, how it works, and what home buyers need to know about the pros, cons, and dangers of these loans.
Why do people avoid balloon mortgages? ›
A balloon payment loan has lower monthly payments for a set period (generally three to 10 years) and one big "balloon" payment when the loan term ends. Because the balloon payment is significantly more than your regular monthly payment, these loans can be risky.
What are the disadvantages of balloon mortgages? ›
- Slow or no equity building with a balloon mortgage when interest only payments are made.
- Difficulty in changing terms of loan or refinancing the mortgage.
- Long term risk if homeowner is unable to accumulate and save lump sum payment.
Risk to home: Because you need to make a lump sum payment when the loan comes due, you'll either need to save enough cash, refinance or sell the home. None of these options are guaranteed, and if you can't make the payment, you could lose the home and severely damage your credit.
What is a 5 year balloon with a 30 year amortization? ›
A balloon mortgage, by comparison, might have a five-year term and a 30-year amortization. You'll make the same payment every month for five years (60 months) that you would have made on the loan with the 30-year term. But after that, you'll owe all of the remaining principal.
What is the typical life span of a balloon mortgage? ›
Balloon mortgages typically range from five to seven years, compared to traditional mortgages lasting 15, 20, or 30 years. Shorter loan terms appeal to homebuyers wishing to quickly pay off the home without incurring additional interest.
Can you pay off a balloon mortgage early? ›
Many mortgage types charge a prepayment penalty, or a fee for paying off a large chunk of your principal early. Balloon mortgages don't usually impose prepayment penalties, though, so you can make significant additional payments toward your mortgage to reduce the amount you'll pay at the end, at no extra cost.
How do I get rid of a balloon mortgage? ›
Get a Refinance
Provided you refinance your property within the time frame permitted by the loan (or are willing to pay any prepayment penalties) this effectively kicks the balloon payment further down the road. Or, if you refinance with a fully amortizing loan, the new financing can remove it entirely.
Who is balloon mortgage best for? ›
But, in some cases, a balloon mortgage is the best option. Two prime cases where balloon mortgages make sense are: A borrower can't qualify for a long-term, fixed-rate loan because their income fluctuates.
There are many competitive loan products available for refinancing a balloon mortgage, including options that offer 30-to-35-year loan amortizations.
Can I refinance a balloon payment? ›
Don't let that balloon payment burst your car ownership dreams! We have just the solution. By refinancing, you are able to extend the repayment period and break down the final amount into more manageable monthly instalments.
Who benefits from a balloon loan? ›
Those consumers who plan to live in a home for only a short period of time, might do well to take out a balloon mortgage. Say they plan to move in three years. They can take out a five-year balloon mortgage at a lower interest rate and then sell their home long before that massive balloon payment becomes due.
Why would a borrower want a balloon payment mortgage? ›
Balloon loans can be attractive to short-term borrowers because they typically carry lower interest rates than loans with longer terms. However, the borrower must be aware of refinancing risks as there's a possibility the loan may reset at a higher interest rate.
Can you pay off a balloon payment early? ›
Paying off a balloon payment
You can start paying off the balloon payment at any time – if you can afford to pay more than your monthly instalment, you can use the extra money to reduce the balloon amount, so you'll have less to pay at the end of your loan term.
Is balloon financing a good idea? ›
Are Balloon Payments a Good Idea for a Car Purchase? A balloon payment may be suitable for borrowers who are in urgent need of a car but are unprepared to deal with a large monthly payment. In such cases, the borrower will probably pay a higher interest rate than is charged on a conventional car loan.
Is it worth paying balloon payment? ›
Benefits. A large balloon payment is likely to mean your monthly payments will be lower. If you love your car, you can keep it if you're able to make the balloon payment. When your term ends, if your car is worth more than the lender estimated, you could make the balloon payment and then sell the vehicle for a profit.
