What is a Balloon Mortgage and How Does It Work?

There are various mortgage options to consider when it comes to home financing, from conventional loans to government loans. In addition, you can also choose length of terms, and fixed or adjustable rates. Another option you can choose is what we call a balloon mortgage. 

What is a balloon mortgage? 

A balloon loan is financing that includes a lump sum payment schedule at any point in the term, although it’s usually at the end. There are two routes you can go here: the first is an interest-only loan, where you make interest payments, and then the entire balance is due at the end. The second is a combination where the balance and interest payments lead to a smaller lump-sum payment at the end. 

The one thing to know about balloon loans (no matter what kind), is that they don’t pay off fully through regular monthly payments, and you should prepare yourself to deal with a lump sum payment at the end.  

How does a balloon mortgage differ from other mortgages? 

While other loans fully pay off at the end of the loan, a balloon loan has a lump sum payment at the end of the loan (and isn’t fully paid off). The schedule for which these loans are paid off is called an amortization schedule. In a nutshell, the schedule will show you how much of your monthly payments are going towards interest and how much goes towards the balance of the loan. This is the case whether it’s fixed or adjustable.

What are the advantages of a balloon loan? 

Balloon loans definitely have their disadvantages, but there are some perks that are highly beneficial given the circumstances. The benefits to a balloon loan are:

• Lower monthly payments 
• Not having to pay a large payment for several years 
• You can afford a home quicker
• It gives you time to get your finances in order
• You’re setting yourself up for a shorter-term mortgage

What are the disadvantages of a balloon loan? 

There are unfortunately a number of downsides to balloon loans, the main reasons being:

• It’s higher risk for buyers and lenders
• Potential for market change
• Qualified mortgage loans usually have better rates 
• Might be more difficult to refinance 

Is a balloon mortgage right for me? 

A balloon mortgage might be a good fit for you based on the advantages listed above. But if the disadvantages outweigh the good, you might want to reconsider. While it’s a good option for some, the big backend payment is a tough pill to swallow. This type of mortgage might be suitable for you if you are able to pay off the back part of the loan and you’re getting a mortgage because you’re investing your money in other things right now.

Are you ready to get the ball rolling on your mortgage? Do you have questions about whether a balloon mortgage is right for you? The team at Equity Mortgage can help! Contact us online, or give us a call at (443) 471-4310.