If you are in the process of getting or buying a home and you are getting a mortgage, a mortgage broker or other professional may suggest the usage of a balloon payment. Balloon payments are rare, as the standard government mortgages backed by Fannie Mae and Freddie Mac do not use them, and balloon payments fell out of favor when many people ran into trouble with them during the housing crisis of the late 2000s.
But the idea of a balloon payment may be presented to you as an option, so you should be aware of what they are and the potential pitfalls of using them.
What is a Balloon Payment?
When you take out a traditional mortgage, your payments are spread out evenly, so you have the same or about the same payment every month over the course of the loan (usually 30 years). After the end of the 30 years, you are done with your payments, and you own the home outright.
But a balloon payment works differently. With a balloon payment, you will make monthly payments that are much less than on a traditional 30-year mortgage. The downside to this advantage is that when you are at your last payment, you will have a balloon payment—a payment that is more—sometimes much more—than all your other payments.
In fact, the balloon payment can be thousands or tens of thousands of dollars. And if you cannot pay that balloon payment, you will be foreclosed on and lose the home—even though you made every other prior payment on time.
The balloon payment is not an extra payment—it is just the balance of the loan that you did not pay previously. You are basically putting off a given amount of the principal of the loan until the end in return for smaller monthly payments during the life of the loan.
Who Should Use Balloon Payments
Balloon payments may work for some people. For example, maybe at the end of the loan, you anticipate coming into money, say, from an inheritance or some good business windfall. You need the cash flow now, making the smaller payments better for you.
Balloon payments may work for people who intend to only own property for a few years. So, you anticipate selling the property before the balloon payment ever becomes due. Just remember that if you do sell the property before the balloon payment is due, you will not have as much equity in the property because much of the principal has not been paid by your regular monthly payments.
But balloon payments can be dangerous because if something happens and you cannot pay the last inflated balloon payment, you will lose the property.
You may be able to refinance before the balloon payment into a more traditional mortgage—but that depends on your credit and income and comes with the expenses related to refinancing.
Contact our New Jersey real estate law and closing attorneys at The Law Office of Agnes Rybar LLC today for help with your real estate closing.
Sources
https://www.lendingtree.com/home/mortgage/what-is-a-balloon-mortgage-loan/
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