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What are the pros and cons of a balloon mortgage?

On Behalf of | Nov 6, 2023 | Real Estate

Interest rates on mortgages are sky-high right now, and that’s making it harder than ever for people to afford the homes of their dreams.

Would-be buyers are looking at plenty of alternatives to traditional 30-year, fixed-rate loans, and one of the choices that tends to come back into vogue during periods of inflation is the “balloon” mortgage.

What’s a balloon mortgage?

A balloon mortgage is a type of mortgage loan that offers lower monthly payments for an initial period, typically ranging from five to seven years. However, at the end of this initial term, the borrower is required to make a large, one-time payment (the “balloon payment”) to pay off the remaining balance on the loan. This balloon payment is significantly larger than the regular monthly payments and can easily be tens of thousands of dollars.

What are the benefits of a balloon mortgage?

It’s harder to find a lender willing to offer balloon mortgages, but they do have their benefits, particularly when interest rates are soaring. If the interest rates cycle back down again within the next few years, you can refinance the home with a traditional mortgage at a reasonable rate. Meanwhile, the lower monthly payments you have today can make it possible for you to afford a much better home than you might otherwise be able to manage on your budget.

What are the drawbacks of a balloon mortgage?

The most significant problem with a balloon mortgage is the obvious one: That big payment will eventually come due. If something happens between now and then in your personal or professional life that makes it impossible for you to refinance, you could end up in foreclosure. Plus, there’s no guarantee that you’ll actually see interest rates improve over the next few years, so that’s a definite gamble.

Understanding all of your options when you’re buying a home can be difficult. Legal guidance can make it easier.