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Home Loan & Home Mortgage Article Series
Are
Balloon Payments Full of Hot Air?
Mortgages and loans often have many different
aspects. Each type will fit into one’s life either for better
or worse. Before investing in a certain type of loan, it is
best to know what qualifies you for this loan and what the
regulations are on receiving this money. One of these types
of loans is known as a balloon loan. A balloon payment
is one where there is a large, lump sum payment due at the
end of
a series of smaller periodic payments. These are usually included
in loans or leases at the end of the term in which you are
paying them for. Most balloon payments are taken when refinancing
or when one is expecting an increase in cash from something
such as inherited money, a large tax refund, or expected dividend.
There are several different advantages and fall backs to balloon
payments. Depending on the type of loan that you need and how
you wish to pay this loan off, balloon payments may or may
not be the right choice in taking out a loan.
The
first advantage to this type of benefit is that the down
payment will often be lower than it would normally be. Another
advantage is that balloon payments often come with lower interest
payments, which causes little capital outlay. If you choose
this loan, you will be able to have more flexibility to advance
capital during the loan. A third benefit is that the monthly
payments will be lower than they would if you didn’t have a
balloon payment. It is also possible to convert a balloon payment
into smaller payments at any time during your loan if the money
that you may receive is not going to come through. It is important
to make sure that this is an option before you begin a balloon
payment. Another benefit to balloon payments is that the interest
rate will not adjust when rates go up on a national level.
Once the first rate is set, it will stay in that category.
One
of the problems with a balloon payment is that the payment
at the end will be fairly large. You will have to be careful
to decide on whether to make an investment if you do not know
if there will be money coming in at a certain time. Another
disadvantage is that the refinancing cost could become a larger
challenge and cost more than expected in the end. If the interest
rates increase while you are in a balloon payment, you will
end up paying additional costs when wanting to refinance at
the end. If rates rise more than five percent above the balloon
interest rate that you began with, you will have to re-qualify
for a loan and have your home reappraised. This will end up
costing you more money in the end than you were trying to save.
This is risky because of the fluctuation that happens with
rates on a consistent basis. If you catch things at the wrong
time, you will have to start the process of taking out a loan
from the very beginning, which will end up costing more.
Before
getting a balloon investment it is important to check
on a number of factors, including the interest rate which you
will start out with, when you will owe the balance, the refinance
options available, whether you will be able to change your
balloon payment to a regular payment and whether you will have
to re-qualify for a mortgage when the final payments are due.
If you get into a balloon payment, it is important to know
that you will be able to get the fixed amount by the time the
final balance will be due. It is also important to look into
what will happen after this payment is due so that you don’t
get caught in an endless cycle of having to take out loans
for your home. If these factors will fit, then the disadvantages
will be of no importance.
The time to get a balloon investment is if you know that you
will have end money, are looking for lower interest rates or
know that you will be in the home for a defined period of time.
If these factors don’t fit, or it seems like a risk to get
into a balloon payment, than other mortgage and loan options
are better to look into.
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SolveYourProblem.com : 2007
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