Balloon Payment Mortgages
Balloon payment mortgages are mortgages that have low initial payments for a set term and then one large 'balloon' payment at the end of the loan. Some balloon payment mortgages allow you to pay only the interest on the money you borrowed. These are called interest only mortgages. Some balloon payment mortgages allow you to pay only a small portion of the principal that you would repay with a conventional mortgage each month, making up the difference with one large final payment. Some borrowers expect that you will refinance the principal when the balloon payment comes due.
Since you aren't paying as much principal with each payment with a balloon payment mortgage, each payment is considerably lower than it would be with a conventional mortgage. But, the amount you owe the bank does not decrease as fast as it would with a conventional mortgage. With the lower payments, you can either buy a bigger home than you could afford with a conventional mortgage or you can invest the money hoping to get a better return.
Balloon payment mortgages are a very useful tool in the right circumstances. Many home buyers who are confident they will sell their house before the balloon payment is due can enjoy the lower payments. These home owners count on the value of their house increasing, so that when they sell, they have enough to pay off the mortgage. The obvious disadvantage to this is that your home's value may go down if the market is in a slump. If you get less for your house than you owe the bank, you have to make up the difference out of your pocket.
Balloon payment mortgages may be attractive to home buyers who expect to receive a large sum of money in the future. They may plan to inherit money or collect a settlement from a lawsuit or from selling other property. The lower payments with a balloon loan lets them afford a larger house that they're confident they can pay off in the future.
Balloon loans often seem very attractive -- frequently lenders offer them with very low interest rates. The rates can either be fixed or adjustable depending upon the lender. Many people view balloon mortgages as risky and prefer to stick with an adjustable rate mortgage that may offer equally low rates while avoiding the risk of the final balloon payment.