What is Balloon Mortgage and How Does It Work?
Because there will still be accrued interest at the end of the loan term, this past due amount is considered "capitalized", and therefore added to the outstanding principle balance. When a buyer reaches the end of his mortgage loan term, the remaining principle is due immediately and in one lump sum. If the borrower does not have enough cash on hand to cover the amount of the balloon payment, then he must obtain another loan for the balloon amount, or refinance the mortgage to include the balloon payment into the new loan.
Balloon mortgages are not uncommon, and they allow borrowers to obtain mortgages with lower monthly payments because of the significant lump sum they have agreed to pay later. For those borrowers who appropriately plan for such situations, the balloon loan can be a good advantage. For those borrowers who do not plan for the balloon payment, or whose credit becomes bad enough to prevent them from obtaining new financing, there could be significant risk with this type of loan.
So, a balloon mortgage needs to be considered with caution. It can be very risky. Only consider this type of mortgage if you are absolutely positive that you will be able to refinance, sell your home or pay off the mortgage well before the deadline.
Related Tags: home loan, mortgage loan, balloon mortgage
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For more information about balloon mortgages read: Does Anyone Really Ever Get a Balloon Mortgage? How Come I've Never Been Offered One?
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