Balloon Mortgage Loans
In this guide, we will cover how Balloon Mortgage Loans work. Balloon mortgage loans are mortgages that can help you lower your monthly payments. They have low-interest rates and small payments for five to seven years.
Balloon mortgage loans are commercial loans that are normally amortized over 25 to 30 years that, are interest only, and come due every three, five, or seven years. When the balloon period comes due after three, five, or seven years, the borrower needs to get refinancing for the commercial loan balance.
You have to completely pay the loan balance in one big amount at the end of the mortgage. This can be an excellent move for borrowers but also risky for others. This blog will explain balloon loans, who can benefit from them, how they work, and what to consider before applying. You will better understand balloon mortgage loans and whether they suit you.
What are Balloon Mortgage Loans?
A balloon loan is a mortgage that offers low monthly payments initially, followed by a large lump sum payment (the balloon payment) at the end of the loan term. John Strange, a commercial loan officer at Lending Network, LLC, explains what balloon mortgage loans are as follows:
Balloon mortgage loans are commercial interest-only loans that balloons every three, five, seven, or ten years. When the balloon comes due, the entire loan balance needs to get refinanced by the existing lender or new lender.
Typically, the loan term is shorter than a traditional fixed-rate mortgage, ranging from five to seven years. Balloon loans are often used when borrowers anticipate an increase in their financial capacity or plan to refinance or sell the concerned property before the balloon payment becomes due.
How Do Balloon Mortgage Loans Work?
Balloon loans operate differently from conventional mortgages. Let's break down the key components. In this section, we will discuss the structure of balloon mortgage loans.
Monthly Payments The monthly payments for balloon loans are calculated based on a longer amortization period, typically 15 or 30 years, even though the loan term is shorter. As a result, the monthly payments are relatively lower during the initial period but only partially repay the mortgage loan by the end of the term.
The loan structure of balloon mortgage loans is structured to have a predetermined loan term and a fixed Interest rate, typically ranging from 5 to 7 years. During this period, borrowers make monthly payments based on an amortization schedule that covers only a portion of the principal and interest of the loan. However, the remaining balance is due as a massive payment at the end of the term, called a balloon.
How Do Payments of Balloon Mortgage Loans Work?
Balloon Payment When the loan term expires, borrowers must pay the balloon, which covers the remaining loan balance. This payment can be substantial, accounting for the entire unpaid principal.
Case Scenario How Balloon Mortgage Loans Work
Here is an example of how a balloon loan works: You are buying a property that costs $300,000. You apply for a balloon loan with a 5-year fixed-rate period and a 30-year amortization schedule. Your monthly payments are calculated like paying off the loan over 30 years, but you must pay it off in 5 years.
You get approved for a balloon loan with an interest rate of 3% and a down payment of 20%. This means that you borrow $240,000 and pay $60,000 upfront. Your monthly payments during the fixed-rate period are $1,012. This includes $600 in interest and $412 in principal. After five years, you have paid $60,720 in interest and $24,720 in principal. This means that you still owe $215,280 on the loan. At the end of the fixed-rate period, you must pay off the remaining balance of $215,280 in one lump sum. This is your balloon payment. In the following sections, we will discuss the pros and cons of balloon mortgage loans.
Advantages of Balloon Mortgage Loans
Advantages of balloon mortgage loans include lower initial monthly payments: Balloon loans offer lower monthly payments during the loan’s initial period, making it attractive for borrowers with temporary financial constraints: Alex Carlucci, a senior commercial loan officer at Lending Network, LLC, shares the advantages of balloon mortgage loans:
There is a lot of flexibility for refinancing or selling: Borrowers can use balloon loans to sell the property or refinance before the balloon payment is due.
Potential interest savings: If borrowers intend to sell or refinance the property before the balloon payment, they may benefit from lower interest costs than traditional long-term mortgages.
Disadvantages of Balloon Mortgage Loans
Risk of refinancing difficulties: Borrowers may face financial challenges if they cannot refinance or secure another loan to cover the balloon payment. Uncertainty in future interest rates: Dale Elenteny of Lending Network, LLC, says the following about balloon mortgage loans:
Since balloon loans usually have shorter terms, borrowers may face higher interest rates when refinancing if rates have increased.
Limited options for specific borrowers: Balloon loans are only suitable for some borrowers, especially those who cannot make a large lump sum payment at the end of the term.
Things To Know Before Applying for Balloon Mortgage Loans?
Balloon mortgage loans can appeal to borrowers of commercial loans. Balloon mortgage loans have challenges and risks you should consider before applying. Consider the following before choosing a balloon loan. Frequently asked questions from borrowers of balloon mortgage loans are can you afford the balloon payment?
The team at Lending Network, LLC are experienced commercial lenders and mortgage brokers who can help you find the best balloon loan for your needs and goals. Our experts will be with you and help you get the best deal possible and suitable for your needs. Don’t wait any longer. Reach out to us today, and Lending Network, LLC will assist you in transforming your dream of homeownership into a tangible reality.
Before applying for a balloon loan, you should ensure you can pay off the balloon payment at the end of the term. You should have a solid plan to pay off the loan balance when it is due and some backup plans in case things go wrong. For example, you should have some savings or assets you can sell. You should also have good credit and income to help you refinance or get another loan if necessary.
FAQs of Balloon Mortgage Loans
Before refinancing, how long do you plan to keep the property or the current loan? The length of time you will stay and live in the home or keep the investment property is key to whether balloon mortgage loans will benefit you. Dale Elenteny of Lending Network, LLC explains the benefits of balloon mortgage loans:
Before applying for a balloon loan, you should also decide how long you plan to live in the property. If you will stay for a more extended period than the fixed-rate period or are not sure about your plans, you may not want a balloon loan because it can cause problems when the balloon payment is due.
If the market is not in good shape, you may have trouble selling your home quickly or reasonably. You may also have difficulty refinancing your loan if interest rates are higher or your credit or income has worsened. Borrowers should thoroughly understand the terms and conditions of the loan.
Before applying for a balloon loan, study the terms and conditions carefully. You should know how much interest rate and fees you will pay during the fixed-rate period and how much loan balance you will have at the end. You should also know what penalties or fees you will face if you miss the balloon payment or want to settle the loan early. You should also compare lenders and offers to find the best deal possible.
In this section, we will cover how balloon mortgage loans work. Balloon mortgage loans offer low-interest rates and lower monthly payments for a certain period, followed by a large lump of the loan balance due when the balloon comes due.
How Can I Get Approved For Balloon Mortgage Loans
Balloon mortgage loans can benefit some borrowers who plan to sell their home before the balloon payment is due or expect their income to increase significantly. Ronda Butts, a commercial loan officer at Lending Network, LLC, warns about balloon mortgage loans as follows:
Balloon Mortgage Loans help borrowers take advantage of low-interest rates and refinance later when rates are higher. However, balloon loans also come with risks and challenges that borrowers should consider before applying.
They should ensure they can afford the balloon payment needed at the end of the mortgage term or have some backup options in case they cannot. They should also consider how long they plan to stay in their home and whether they can sell or refinance their loan when needed. They should also carefully review the terms and conditions of the loan carefully and compare different lenders and offers. If you intend to apply for balloon mortgage loans or want to learn more about them, don’t hesitate to get in touch with us at Lending Network, LLC.
