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What Is a Balloon Mortgage and How Does It Work?

A balloon mortgage might be an excellent option for you, depending on your specific situation.

If you’re new to mortgages, the term “balloon mortgage” will be unfamiliar to you. So what exactly is a balloon mortgage? A balloon mortgage is a type of mortgage with its benefits and drawbacks.

If you’d like to learn more about balloon mortgages, you’re in the right place. Below, we’ll look at what a balloon mortgage is and how it works.

What Is a Balloon Mortgage?

A balloon mortgage is a type of mortgage that starts with little or no monthly payments at the beginning. However, the borrower is expected to pay a lump sum of the loan amount during the course of the loan. Most borrowers make this payment at the end of the loan term.

How Do Balloon Mortgages Work?

Like conventional mortgages, a borrower will take out a particular mortgage from the lender. Payment terms vary from lender to lender, but they generally follow the same pattern.

During the start of the repayment, the borrower will have to make fixed monthly payments to the lender. Some lenders adopt the interest-only payment approach where the lender only pays the interest amount during the initial months. The borrower pays the balance during the last month, which comprises the principal amount and associated mortgage fees.

Lenders have to pay the interest and principal amount in small monthly payments with other borrowers. However, the payments are small at the start of the mortgage. At the end of the mortgage, the lender has to pay a lump sum to fulfill the mortgage.

Benefits of Balloon Mortgages

Balloon mortgages are popular with homeowners because of their many benefits. Some of these benefits include:

  • Affordable Down Payment – The low-down-payment is what makes balloon mortgages so attractive to homeowners. This widens the scope of eligibility and makes it open to many home buyers.
  • Low-Interest Rates – Balloon mortgages are low-interest loans, translating to low monthly payments. This makes them great for individuals on a tight budget that need a place to call home.
  • Straightforward Qualification – It’s much easier to qualify for a balloon mortgage than a conventional one. This means if you don’t qualify for other mortgages, you can give balloon mortgages a whirl.

Drawbacks of Balloon Mortgages

Balloon mortgages aren’t without their drawbacks. Borrowers who cannot meet the lump sum payment risk foreclosure on their homes. This is pretty common because most borrowers can’t fulfill the large lump sum amount.

Contact Better Rate Mortgage

A balloon mortgage might be an excellent option for you, depending on your specific situation. Crunch the numbers and see whether a balloon mortgage is right for you.

Are you planning to buy a home in St. Louis? Contact Better Rate Mortgage today to get started on your mortgage. We offer the best deals and terms in town. So call us now and book an appointment!

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Whether you’re purchasing your first home or taking cash out to make your dream home even dreamier, the door is open. Welcome to Better Rate Mortgage.

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