Balloon Mortgage: Definition, Pros and Cons

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Balloon mortgages are short-term home loans that allow borrowers to make small monthly payments — or no payments at all — for several years. After that initial period is over, though, the remaining balance is due in one lump sum.

There are circumstances where a balloon mortgage is appealing, but they come with significant risk to both the borrower and the lender. Because of that, it can be difficult to find a lender willing to finance a balloon mortgage.

Here’s what you need to know about balloon mortgages, including what they are, benefits and drawbacks and whether or not they’re right for you. 

What we’ll cover

What is a balloon mortgage and how does it work?

Unlike traditional 15-year or 30-year mortgages, balloon mortgages have much shorter loan terms, typically just five to seven years.

In most cases, borrowers make small fixed monthly payments, though in some cases no payment is required at all. The catch, however, is that when the initial period is over, you have to make a “balloon” payment — one large installment that covers the remaining balance and any fees

Types of balloon mortgages 

Who are balloon mortgages for?

What kind of buyer would a balloon mortgage make sense for? Borrowers who:

  • Already have the full payment.
  • Plan to sell the home.
  • Expect an inheritance or income increase.
  • Expect to refinance their mortgage during the loan period.

Since none of these scenarios are guaranteed, there is significant risk involved.

Pros and cons of balloon mortgages

Other mortgage options

Rocket Mortgage

  • Annual Percentage Rate (APR)

    Apply online for personalized rates

  • Types of loans

    Conventional loans, FHA loans, VA loans and Jumbo loans

  • Terms

    8 – 29 years, including 15-year and 30-year terms

  • Credit needed

    Typically requires a 620 credit score but will consider applicants with a 580 credit score as long as other eligibility criteria are met

  • Minimum down payment

    3.5% if moving forward with an FHA loan

Awarded CNBC Select’s best mortgage for saving money, SoFi offers up to $9,500 in cash back if you buy your home through the SoFi Real Estate Center. 

You can get a mortgage with as little as 3% down and a 0.25% discount is available for signing a 30-year mortgage.

SoFi

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, jumbo loans, HELOCs

  • Terms

  • Credit needed

  • Minimum down payment

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Bottom line

Because they’re shorter than traditional home loans and require a big lump payment, Balloon mortgages are riskier than typical home financing options. Buyers counting on a change in fortune or to flip the property may want to consider a balloon mortgage, but they should explore other options first.

Why trust CNBC Select?

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.



Sumber: www.cnbc.com

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