All About Mortgages: What are the Advantages and Disadvantages of a Balloon Mortgage?

In this article, you will learn what are the advantages and disadvantages of a balloon mortgage. This article is part of a series ‘All About Mortgages’ that answers questions for those who seek out a general knowledge on the subject matter.

Most balloon mortgages during the 1920s were interest-only loans, where the borrower paid no principal. When the loan came to maturity, about 5 or 10 years, the loan that had to be repaid became equal to the original loan amount. In today’s market, balloons are calculated on a 30-year amortization schedule, which allows for some principal reduction.

What are the Advantages and Disadvantages of a Balloon Mortgage?

What is a balloon mortgage?

In short, a balloon mortgage is a loan that is “payable in full after a period that is shorter than the term.[1] Distinctively known for its negative amortization and short loan duration, a balloon mortgage is quite different from other types of traditional mortgages. It has small fixed monthly payments and shares most characteristics with a 30-year fixed-rate mortgage. The loan can be calculated based on a thirty-year period. The most notable feature of this loan is that you must make a large payment in the end to cover the outstanding principal. Unlike a fixed mortgage where your loan will be paid once the term comes to an end. In this loan, the final principal amount that you pay can be 1.5-2 times more than the monthly payments that you’ve previously made.

ResourceMortgages For Dummies

Comparing an Adjustable-Rate Mortgage and a Balloon Mortgage

Understanding the balloon mortgage is useful to compare it with an adjustable-rate mortgage. Both the adjustable-rate mortgage and balloon mortgage offer a fixed rate in the early years, and both obtain an increased risk in the later years. However, there are a few key differences.

Adjustable-Rate Mortgage

  • Adjustable-rate mortgages substantially increase its rate after the 5- or 7-year period and are greater than the balloon.
  • Borrowers may have trouble refinancing their balloon mortgage if interest rates significantly increased. The contract allows lenders to decline to refinance if the interest rates increased more than 5 percent.
  • Borrowers who are having difficulty with payments may find it hard to refinance the balloon. The contract allows for lenders to decline to refinance if the borrower missed just a single payment. No problem with the adjustable-rate mortgage.
  • Borrowers incur refinancing cost with a 5 or 7 balloon loan. With an adjustable-rate mortgage, borrowers do not unless they refinance.

Balloon Mortgage

  • Balloon mortgages are easier to understand.
  • The interest rates on an adjustable-rate mortgage are higher than a balloon mortgage.

What are the Advantages and Disadvantages of a Balloon Mortgage?

Advantages

Low-Interest Rates

The most desirable feature of the balloon mortgage is that it has the lowest interest rates compared to other mortgages on the market. You make small monthly payments and can qualify for a huge loan than a fixed or adjustable-rate mortgage. The rates can either be adjustable or fixed depending on the terms of the lender. The loan may also be adjusted in a way that allows the borrower to make low monthly payments and finally make a lump sum amount during maturity. The duration can range from 2-30 years and you can make an early repayment without being penalized. In case you’re expecting a financial downfall before the term of the loan expires, you can avoid this by selling your home before loan maturity.

You can Re-calculate Your Mortgage

As a borrower, balloon mortgages allow you to re-calculate your loan based on current interest rates then use the newly calculated payment terms to pay the remaining loan. However, for you to qualify for this, there are conditions that you should meet. The terms include:

  • No delinquency in loan payment within the past one year.
  • You should be living in the property and,
  • There should be no liens on the property in question.

Ability to Refinance with Another Loan

When a balloon payment is due, there is an option that can enable you to pay off the amount which is—obtaining an additional loan or simply refinancing. The newly obtained loan helps to spread the loan’s repayment period. For instance, if it’s a 7-year loan, then you can add another 5 years. You can refinance a property loan into a 15 or 30-year loan. The challenge, however, is that you have to maintain good credit along with assets and income to be able to qualify for the new loan.

The Liability is Paid Off Quickly

The advantage of taking a balloon mortgage is that the loan that you owe is paid off quickly. In case you have cash, you can pay the loan off when it’s due. Other options can help you pay the loan like selling an asset especially the one you bought using the loan. One thing to note is that properties with this loan do sell quickly. If you have a good credit rating, you can receive an attractive interest rate on the property. This is what most people refer to as fast and bulk repayment. If you utilize the loan properly, you can get a small fortune for yourself from the loan.

Payment can be Made Any Date

There are no strict and stringent rules when it comes to paying off a balloon mortgage. You can make payments at any date and the rule applies to various mortgages that have the clause of a balloon mortgage in their agreement.

ResourceThe Complete Dictionary of Mortgage & Lending Terms

Disadvantages

Short repayment time is the most prominent drawback of a balloon mortgage. Although the payments are usually calculated on a 15-30-year amortization schedule, the loan’s maturity is 5- 7 years. It means you need to have the money handy to make the balloon payment once the date is due. This can be a big challenge in case you’re trying to cope up with financial windfalls. It may also force you to sell your property or find another refinancing option. The worst is that if the rates have changed or your credit rating has deteriorated, then your chances of getting an affordable mortgage will be minimal. Additionally, you may not be certain whether your property will sell for you to pay off the loan. The whole idea of having to lose your property to pay off the loan is a big drawback.

High Risk of Default and Bankruptcy

While default and running bankrupt may be the last thing to expect when borrowing a loan, it commonly happens. Remember that although you’re paying the interest in the monthly payments, you are not accumulating any equity.

The Reset Option May be Undesirable

Some of the loans come with a reset feature at the end of a specified term. In such a case, your interest rates are reset based on prevailing amortization schedule and rates. The adjustments are made to suit the loan term left but whether your loan comes with a reset option or not, you might be compelled to sell your property to finance the original loan before it matures.

Unpredictable Rates May Lead to Losses

If you the borrower decides to pay off the loan and the real estate rates have decreased, then you might suffer great losses or even be left with a worthless property. Alternatively, if you decide to convert it to a regular mortgage, then you might face even sheer rates.

It is Expensive in the Long Run

While you may view the small interest rate payments as low, the final figure that you pay is quite large compared to a traditional loan.

Conclusion

What are the advantages and disadvantages of a balloon mortgage? Depending on your situation, this loan can either be favorable or unfavorable. It is vital to understand how it works first before taking the loan. It can be a good option if you have a lump sum amount to pay in the end but if you are unsure of getting a balloon amount, then you may opt for another loan.

Bibliography

[1] Guttentag, J. (2010). The Mortgage Encyclopedia. New York, NY: McGraw Hill.

This page may contain affiliate links. This website may contain content that comes from Amazon. This website and its pages are not intended to constitute legal, financial, or tax advice. The information on this website and its pages are not intended to constitute investment advice and all content are the views and opinions of the author(s), contributors, or administrators. Please read our disclaimer for more info.

Hi. My Name is

James Gheen

Welcome to the Bigger Investing website. I’m here to help you find the resources, motivation, and guidance for all entrepreneurial, investing, business, career endeavors, and more, so that you can invest in what’s most important. Your mind!

My focus is to equip you with expert sources, books, guides, articles, and more to help you achieve your personal goals.

Want to learn more? Take a look.

getabstract ad


Read in Graphics

Rich Dad Summit Ad

Best Books on Technology Industry

Best Books on Technology Industry

echnology in our society is something that helps us in many ways. It has changed the way we work, communicate, do business, and even how we learn. This blog post will provide you with a list of some great books on the technology industry to help...

What Businesses Use Telemarketing?

What Businesses Use Telemarketing?

elemarketing is a marketing technique that has been in use since the 1930s. It was developed to help businesses and individuals reach out to customers and potential clients by phone. Businesses of all sizes can benefit from telemarketing, but...

How Do I Start a Telemarketing Business?

How Do I Start a Telemarketing Business?

fter you have thought about the potential of a telemarketing business and decided it is for you, there are many steps to take before launching your company. First, find an office space that will suit your needs and then start looking for...

Best Books on Telemarketing

Best Books on Telemarketing

he most important part of a telemarketing campaign is the initial contact. This is where you make your pitch, and to do this effectively, you need to know what script to use. A good book on telemarketing will guide you through every step of the...

What are the Seven Rules of Negotiation?

What are the Seven Rules of Negotiation?

egotiation is a crucial skill to have in any business. It can be used not only with clients but also internally to get the best terms for your company and employees. While there are many different ways to negotiate, some of the most important...

What are Good Negotiation Skills?

What are Good Negotiation Skills?

he ability to negotiate is one of the most essential skills that a person can have. Negotiation is not only important in business, but it's also an important skill in life. The way you negotiate will determine your future success and happiness. A...

What is the Key to Successful Negotiation?

What is the Key to Successful Negotiation?

here are certain things you should never do in a negotiation. When I was just starting out, these were some of the most difficult lessons for me to learn. If you want to be successful at negotiating, there are three basic principles that will help...

How Do You Counter Offer a Salary?

How Do You Counter Offer a Salary?

t can be really difficult to counter offer a salary. When it comes down to it, you want the job and they want you. So how do you turn this situation into an advantageous one? The first thing is to know what your worth is. It may seem like a...

How Do You Start a Negotiation?

How Do You Start a Negotiation?

here are many ways to start a negotiation, but you need to keep in mind that the person on the other side of the table is just as nervous and scared about it as you are. You can make them feel more comfortable by starting with an ice breaker...

What Makes a Good Sales Negotiator?

What Makes a Good Sales Negotiator?

f you're in the market for a good sales negotiator, it's important to know what makes somebody successful at this job. First of all, they have to be able to negotiate well and get their clients the best deal possible. They also need to understand...

What is a Lettings Negotiator’s Salary?

What is a Lettings Negotiator’s Salary?

hat is a lettings negotiator's salary? This question should be on the mind of any prospective rental tenant. The negotiation process can be confusing, and knowing what to expect can help make it less stressful. The first thing to consider is that...

How Do You Deal with a Hard Negotiator?

How Do You Deal with a Hard Negotiator?

f you want to successfully negotiate a deal, it's important that you know how to handle someone who is hard-headed. These people are difficult and will not budge on their prices or demands. In this blog post, we'll discuss strategies for dealing...

What is the Most Important Attribute of a Negotiator?

What is the Most Important Attribute of a Negotiator?

negotiator is someone who helps two parties reach an agreement. What are the most important skills needed for this job? The answer to that question depends on what type of negotiation you're doing. In a business negotiation, it's important to be...

What Are the Characteristics of a Good Negotiator?

What Are the Characteristics of a Good Negotiator?

good negotiator is someone who has the ability to manage their emotions and think strategically. They are also able to communicate well with others, which can lead to building stronger relationships that could be beneficial in future negotiations....

What Country Has the Lowest Capital Gains Tax?

What Country Has the Lowest Capital Gains Tax?

he United States has one of the highest capital gains taxes in the world. It's a whopping 39% on long-term capital gains and 20% on short-term capital gains. If you're looking for a country with lower tax rates, look no further than Estonia. The...

Are There Any Tax Shelters Left?

Are There Any Tax Shelters Left?

here are many different tax shelters, and some of them are more popular than others. One of the most popular is a retirement account such as an IRA or 401k, but there are other options out there. In this blog post, we will explore these...

How Do Billionaires Avoid Taxes?

How Do Billionaires Avoid Taxes?

illionaires have a lot of money and they don't want to pay taxes on it. That seems pretty simple, right? In reality, their tax avoidance is more complex than you might expect. We're going to take a look at the different strategies that...

How Do Tax Havens Make Money?

How Do Tax Havens Make Money?

ax havens are a hot topic these days. They make money by helping businesses, wealthy individuals, and other investors keep their money away from the taxman. This is done in a variety of ways including bank secrecy laws that limit the amount of...

What is Called a Tax Haven?

What is Called a Tax Haven?

tax haven is a country or territory that offers favorable tax rates to foreign individuals, corporations, and other business entities. Tax havens can be either onshore or offshore and are typically characterized by strict banking secrecy laws in...

What is the Benefit of Being a Tax Haven?

What is the Benefit of Being a Tax Haven?

here are many benefits of being a tax haven, which is why so many people are drawn to this type of business. One of the main reasons that businesses choose to move their headquarters offshore is for the purpose of escaping high taxes and...

Is Switzerland a Tax Haven?

Is Switzerland a Tax Haven?

Switzerland is a small, landlocked country located in the Alps. It has been called a tax haven because it does not impose any taxes on personal income or capital gains - but is it really? Switzerland has one of the highest rates of taxation in...

How Can I Live Tax-Free?

How Can I Live Tax-Free?

any people are asking themselves this question. The answer is to move to a state that doesn't have any income taxes or sales tax, and then you will be able to live without having your hard-earned money go towards the government. It's not as...

Where Do the Rich Hide Their Money?

Where Do the Rich Hide Their Money?

he rich have a lot of money, so it is no surprise that they are always looking for ways to protect their assets. However, the question remains: where do they hide their cash? It can be hard to find out what people with a lot of money are doing...

Which Country Has No Tax?

Which Country Has No Tax?

axes are a big deal. In some countries, they cover up to 50% of the GDP. Some people believe that it would be better if there was no tax at all because that means each citizen's earnings will grow faster and more evenly. But which country has no...

Is Dubai a Tax Haven?

Is Dubai a Tax Haven?

he United Arab Emirates is a popular destination for ex-pats and internationals alike. The country has developed rapidly in the last 20 years, becoming one of the wealthiest countries in the world. But there are many who question whether Dubai is...

Are Tax Havens Good or Bad?

Are Tax Havens Good or Bad?

here are many arguments for and against the use of tax havens such as Switzerland, Luxembourg, or Barbados. Proponents argue that they are essential to free trade by protecting investments from taxation in other countries. Opponents claim it is a...

How Does a Tax Havens Work?

How Does a Tax Havens Work?

tax haven is a country with nominal taxes that have low or zero taxation on certain types of income. These countries typically offer favorable regulations for businesses and individuals to help them attract more capital. Tax havens can be used as...

Which Country is the Best Tax Haven?

Which Country is the Best Tax Haven?

he tax havens are a legal way of hiding money from the IRS. They allow people to put their wealth in offshore accounts, which don't have to be reported on any taxes until they're withdrawn. The United States government has been trying for years to...

Are Tax Havens Legal?

Are Tax Havens Legal?

ax havens are a controversial topic. Some people believe that tax havens are illegal, while others think they can be legal. In this article, we will explore the legality of tax havens to help you make an educated decision about whether or not it...

Best Books on Tax Havens

Best Books on Tax Havens

he best books on Tax Havens is a list of some of the most popular and reputable books that can help you learn about how to reduce your taxes by taking advantage of countries with low or no taxation policies. Whether you want to find out about the...