Balloon Mortgage Basics

Tip! Not many people who need to shop for a low mortgage rate actually have gone to school or otherwise been specially trained in financial matters. Therefore, no matter how much time you spend doing amateur research on how a mortgage rate works, youā€™ll probably still have a number of questions regarding your mortgage rate. That is fine. Your representative should go over the ins and outs of your mortgage rate and the other terms and conditions of your loan, making sure all of your questions are answered. If he or she is somewhat secretive about any aspect of your mortgage rate, or if he or she gives you answers that are unhelpful, be cautious. You should read over your mortgage carefully and possibly seek the advice of a financial advisor or mortgage broker to make sure that your mortgage rate is fair and that you arenā€™t being scammed. A friendly and helpful lender is the key to securing a good mortgage rate and a fair mortgage.

Balloon mortgages have a bad reputation these days; however, when used properly they can be an excellent short-term fix to a financial need. Here is how you can use a balloon mortgage to your advantage.

Balloon loans are a short-term mortgage that provides very low monthly payments and low interest rates for a specified period of time. At the end of the specified period of time the balance of the loan is due in full. This means you will have to refinance or pay off the entire loan balance. Most mortgages of this type come with terms ranging from five to seven years. These loans are repaid using an amortization schedule based on 30 years of repayment; while this results in a much lower payment, you will be required to pay more when the balloon payment comes due.

Balloon mortgages are ideal for real estate investors or those trying to sell a property when they have already purchased their new one. There is risk involved with this type of mortgage; if you are unable to sell or refinance the mortgage when the balloon payment is due you could lose your home.

If you are considering a balloon mortgage there are ways to minimize your risk. Conversion and reset options allow you to change the terms of your mortgage when the balloon payment is due. Using this option could result in higher interest rates and finance charges.

• Plan on selling their properties when the balloon payment is due and need low monthly payments.

• Expect a large increase in their income and will be able to pay off the balloon payment when it becomes due.

• If you are planning on staying in your home and will not be able to refinance or pay off the balloon payment when it becomes due.

• If you do now want the risk associated with rising interest rates that could raise your monthly payment significantly when you are forced to refinance the loan.

To learn more about your mortgage options, including how to avoid common mistakes, register for a free mortgage guidebook.

Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.

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Balloon Mortgage Basics