Bursting the Bubble: Balloon Mortgages either fly or burst


Mortgages normally pay off the loan in general. Meaning, taxes, insurance, principal and interest charges each take a piece of monthly payments. These may mean that your payments could be relegated to more pressing charges that, in the long term, may save you precious cash. Balloon mortgages offer you one such opportunity.

Balloon mortgages are designed for people who are set on the idea of staying in their residence only for a limited amount of time. They offer lower interest rates in time spans normally ranging from five to seven years.

Popularly termed as a 5/25 or 7/23, Balloon Mortgages are different from Adjustable Rate Mortgages in that after the determined time limit, the interest rate will only adjust once, to the current 30-year fixed rate. Balloon mortgages do not fully get paid within the term of the loan, thus, the term 'balloon' for the remaining outstanding balance; and outstanding principal may be paid by refinancing the loan or by converting it to a fixed rate mortgage. This depends, though, on many factors. For example, your ability to have dutifully completed payments in the last 24 months.

These plans may be available with as little as five per cent initial down payment, thus, giving you more options on what property to acquire (but you may have to pay private mortgage insurance). Balloon mortgages offer you an opportunity to pay low interest rates first and then pay off the capital later on. Calculations for balloon mortgages are computed normally in the 30 year term. Meaning, all of the interests of the 30 year plan need to be paid within the five to seven year term period. They also offer an alternative to adjustable rate mortgaging, with price difference and payment capabilities being the deciding factors in choosing either adjustable rate mortgaging or balloon mortgaging.

With many consumers choosing to opt out of fixed rate mortgages and choosing interest only plans, balloon mortgaging is another option that should merit significant attention, especially for the more financially capable buyers or those hoping to make investments out of their property acquisitions.

Pros of Balloon Mortgaging:

· Lower interest rates. This is the strongest draw of balloon mortgaging

· Increased home equity acquisition

· Faster payment plans

· Offers great deals for people not looking for long term housing

· Non-traditional mortgaging system that caters to other types of needs

Cons of Balloon Mortgaging:

· The outstanding balance after the term of a balloon mortgage is normally paid with the proceeds of another loan, with fees to be paid.

· At the end of the term, if the contract parameter regarding paying the interest-only charges are not met, then the property may be lost to a lender foreclosure

A balloon Mortgage maybe risky, but if you are confident in your finances and the rates are low, then the opportunity of paying out the entirety of the interest of a 30-year loan in a five to seven year time span and spending the next 23 years of another loan either as continuation, or as another loan entirely, to pay for the principal loan may prove to be a wise move on your finances. Provided, of course, that decisions are given thought and extensively scrutinized.