A first time home mortgage with balloon payment is a fixed interest mortgage with a very short life span. So, while the payments are set up as if the mortgage were going to last say 30 years, after 2 to 7 years, the mortgage actually comes to an end. And you need to pay off the rest of the mortgage at that point. That’s the balloon payment.
Where does this balloon payment come from?
Unless you’ve won the lottery or you have that amount saved up, you will then need to get an entirely new mortgage at that point. However, it will be based on what’s going on with current interest rates then. You don’t generally get favourable rates locked in place.
This could be very good if interest rates had dropped a lot by the time you came to re mortgage.
But, the risk is, will you be able to get a loan for the amount you need (to clear that mortgage balance) at that time? Your credit status could have weakened, interest rates could have soared, your income could have stagnated or dropped …
Some balloon loans have a refinancing option bolted on. With these, your mortgage would convert into a normal fixed rate loan when the balloon payment is due. Going with this option, you could wipe out the risks mentioned above because you and your home won’t have to re-qualify. However, that means you are tied to this lender and you can’t shop around for the best rates at refinance time.
Also with the added refinance option, do look out for conditions and fees.
Balloon Mortgage Loan Action Plan:
- Ask about conditions
- Ask about fees
- Use this checklist -> Two Step Mortgage Checklist
- Compare with a Two Step Mortgage
Tags: first time home mortgage, Hybrid Loans, mortgage with balloon, mortgage with balloon payment
