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Disadvantages of Balloon Mortgages

Balloon mortgages are a type or mortgages wherein the monthly payments are paid within a short time duration, usually at the range of 5-15 years. The monthly payments are computed with a special formula which makes it lower than the traditional mortgage payments. After the duration expired, the borrower will have to pay the remaining mortgage balance, hence its similarity to a balloon filled slowly by air.

Balloon mortgages are popular among people because of the great advantages that it brings. First, mortgagers can claim a property in less than a decade; a lot faster than a traditional 30-year mortgage. Second, the interest rates and monthly payments are cheaper than other types of mortgages which allow people to use more of their earnings in other important expenditures. Lastly, the mortgager can reset or refinance his balloon mortgage if in case he can't pay the remaining mortgage loan and thus, giving him another chance to keep the property.

But even with these advantages, it still has its drawbacks. First, because of the short maturity period, mortgagers have a huge danger of getting into debt easily. Unlike the traditional mortgage, mortgagers have to pay a large sum of mortgage balance at the end of less than one or two decades; and these short years make it impossible for people to save for it. Because of this, this type of mortgage is not a suitable choice for ordinary working people.

If the mortgager is a property seller, then all he has to do is to sell the house before the mortgage reaches its maturity. If the mortgager successfully sells the house, then he easily gets enough amount of money to pay the mortgage loan, pass the property to the buyer and keeps a portion of his earnings. The problem occurs once the realty market is not lucrative on that period and he fails to sell the property. If he fails to pay the loan because of lack of money, the lender might have no choice but to request for a foreclosure of the property from the federal court.

Or course, the mortgager can reset or refinance his balloon mortgage to the same or different lender so he can still pay small amounts monthly and keep the house. The only problem with this method is the monthly payment will now have a huge interest that could leave the mortgager broke for years. The past payments might be cheaper however these are not enough to cover even half of the total amount of the property.

Another problem that the mortgager could encounter is if the lender declines his application for a mortgage reset or refinance. The lenders have different valid reasons in order to decline the mortgager's application such as the mortgager paying past the given date, not paying the amount in full and a past bad credit history. Once this happens, he will have no choice but to give up the property.

People might think that the mortgager who succeeds in selling his property wins the balloon mortgage battle, however this is not always the case. Sometimes, the mortgaged house decrease in value because of the change in the economy. If the buyer buys the house with its new value then the money might be less than the actual cost that the mortgager paid for the property. In this situation, the mortgager lost profit and well as a portion of the mortgage money.

These disadvantages should do not discourage people away from a balloon mortgage but instead give them insights about how it is done. Let these be your guide in deciding whether this mortgage fits your current lifestyle and monthly income or not.

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