Balloon Mortgage:
A Balloon Mortgage is a type of home loan that offers lower monthly payments for a set period, but requires a large lump-sum payment at the end of the loan term. It can be an attractive option for certain buyers.
Key Takeaways:
- A balloon mortgage is a real estate loan with an initial period of low or no monthly payments.
- A balloon mortgage is usually short-term.
- The borrower pays off the full balance in a lump sum at the end of the term.
Pros & Cons of Balloon Mortgages
Pros:
- Low payments for homeowners who plan to stay in the home for a short period
- Low payments prior to a refinance strategy when lower future interest rates are anticipated
- Payment strategy for homeowners who are paid in lump sum bonuses to pay off the balance
Cons:
- Slow or no equity building with a balloon mortgage when interest-only payments are made
- Difficulty in changing terms of loan or refinancing the mortgage
- Long-term risk if homeowner is unable to accumulate and save lump sum payment
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