Be Very Careful With Balloon Payment Loans (2024)

FAQs

What is the major problem with balloon payments? ›

The most significant risk of a balloon mortgage is foreclosure if the borrower can't make the balloon payment at the end of the term. Foreclosure can result in the loss of the home, emotional distress, and impact the borrower's credit negatively, generally for seven years.

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.

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.

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.

Pros of balloon mortgages

Can defer payments for years: Although you'll be required to repay the full balance of the loan in a lump sum payment, you can put this off for several years.

Balloon payment option

The maximum balloon facility is 35% and is subject to the year, make and model of the vehicle and the finance period. Terms and conditions will apply. At the end of the agreement period, you have the following options: You can apply to refinance the balloon payment amount for a further period.

A 30/15 balloon mortgage has a mortgage term of 15 years, but your monthly payments are the same amount as for a 30-year conventional mortgage. After 15 years, you'll pay the rest of your loan (plus interest and fees) as a lump sum.

When refinancing, you're essentially applying for new, additional credit to cover your balloon amount. And according to the National Credit Act (NCA), new credit requires a new credit agreement (in this case, a finance contract). These rules are designed to protect you, as the consumer, from over-extending yourself.

What is a 30-year amortization with a 5 year balloon? ›

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.

Bottom line. Because they're shorter than traditional home loans and require a big lump payment, Balloon mortgages are riskier than typical home financing options. Buyers counting on a change in fortune or to flip the property may want to consider a balloon mortgage, but they should explore other options first.

Balloon loans are riskier for commercial real estate investment. Because of the payment schedule, these loans can be riskier for investors or businesses that want to purchase a piece of property. With a relatively short term for the loan, balloons should not be used for long-term investments.