At this point in the Know Your Mortgage series, you probably think you’re familiar with every type of home loan out there. You probably think you’re the Jacques Cousteau of mortgage types. A 30-year fixed-rate loan? Oh yes, you’ve studied those for years and know they’re beneficial for home owners who don’t plan on leaving their dream house. A VA Loan? Oh, of course you know it’s for veterans so they can refinance up to 100% of their home with no down payment. Alright, do you know what a balloon mortgage is? Hmm? No worries, that’s what the blog is here for. Time to educate ourselves on the unique world of balloon mortgages.
What Is a Balloon Mortgage?
A balloon mortgage is a “you got your chocolate in my peanut butter” merging of two types of mortgages. Balloon mortgages have a fixed rate, but they’re short-term loans like adjustable-rate mortgages, typically running for five, seven or 10 years. The rate the borrower has to pay is low like a fixed-rate loan, which makes it ideal for people who plan on moving after a relatively short run in their house. However, once the loan has reached its timely end, the entire remaining balance must be paid in full. The balloon part refers to the large size of the loan, so think hot air balloon size, not water balloon size.
The Rest of the Loan Is Paid in a Lump Sum with a Balloon Mortgage?
Exactly, but you might have other options. The borrower signs up for a balloon mortgage understanding that it will end with a payment on the remainder of the mortgage, however, there is potential to refinance the loan as well. Please note, not everyone is eligible for refinance at the end of a balloon mortgage so don’t think it’s a guarantee. If your credit and finances are solid, you just might get approved for it and this would be the first time your balloon mortgage rate would change.
The good thing about balloon mortgages is how plainly the pros and cons of it are presented: You can have low monthly payments at a fixed rate for a much shorter amount of time than you would with a regular fixed-rate loan. However, that balloon payment must be made at the end of the agreed term or you better hope you can refinance to pay the rest off. As always, check with your mortgage provider to see what their options are with balloon mortgages and if they even have them available; Quicken Loans no longer offers a balloon mortgage.
If you have any lingering questions on the topic, please ask below!