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What is a Balloon Mortgage?

Many property investors have learned the trick of buying and selling houses for a decent living. Mortgages are available in banks and huge realtor companies to help these people became a legal owner of the property before selling it; however, not all of them have the means to pay a traditional mortgage. This is the reason why balloon mortgages are becoming a popular option for them.

A balloon mortgage is a hybrid of the traditional 30-year mortgage and an adjustable mortgage. Just like a traditional mortgage, the mortgager has to pay a fixed monthly mortgage payment within years but with a lesser mortgage interest rate and payment like the adjustable rate mortgage. At the end of the maturity period, the mortgager has to pay the remaining mortgage balance to the lender, thus the term balloon.

There are many advantages of a balloon mortgage for the mortgager. First, the mortgager doesn't need to wait for 30 years to pay off his mortgage loan. There are some people who simply can't wait for decades to officially own the house that they reside in which is why they are willing to pay it off immediately. A balloon mortgage can lasts from five to fifteen years so people can choose on which mortgage duration is right for them.

Second, the mortgager has to pay a cheaper monthly payment compared to a traditional mortgage. The monthly payment of the traditional mortgage is computed by dividing the total amount of the property with the duration of the payment in months not to mention the added fixed interest rate; and the mortgager has no choice but to pay the exact amount each month. With a balloon mortgage, the mortgager will have to pay a lower monthly payment with a low interest rate based on the offer of the lender. Because of the lower mortgage expenses, mortgagers can easily save more money in order to refurnish their house or to invest in buying a car or their kid's educational plan.

However, the mortgager has to keep in mind that the monthly payments are not enough to amortize the mortgage and thus, he has to pay a large mortgage balance afterwards. Not paying the balance could mean a forced foreclosure of the property and a huge negative remark on his credit rating. This is the reason why property sellers prefer to use this type of mortgage than the traditional one.

For mortgagers who can't pay the amount in full, they can convert their balloon mortgage to refinance or reset their mortgage balance. Reset means that the remaining balance will be turned into a traditional mortgage for the mortgager to pay off in the following years. Refinance means that the mortgager will create a new mortgage loan but the interest rate will depend on the current economic situation. If the interest rates in the economy are high, the mortgager has no choice but to pay the monthly payment no matter how expensive it is.

In addition to these, most lenders only select few mortgagers to have their reset or refinance request approved because they want to ensure that they will really pay their debts. They will check the mortgager's records to see if he pays the monthly payment in full and on the given deadline. Not meeting the requirements could give you a slim chance of converting your balloon mortgage and lead you to foreclosure.

Balloon mortgage is not suited for people who have no means to pay a huge mortgage balance after the given duration which is why getting one has to be thought of thoroughly. But in the end, paying off a balloon mortgage will surely get you the house that you deserve.