Balloon Loans - How One Could Help You
Today, there is a specific loan type for just about anything that you could need money for - whether short or long term. A balloon loan also has a specific purpose, and it could be what you are looking for if you are looking for something that is more of a short term than long term. Here are some ways that a balloon loan could help you.
A balloon loan, whether as a first or a second mortgage, is always set up for a 30-year span. This is so that there is a basis with which to calculate the payments. Your payments will always be what they should be to become fully amortized over the 30-year period. Balloon loans then are given a period of time, such as 5-year, or seven-year, or even a 15-year, in which they become due.
Balloon mortgages are usually fixed rate mortgages. The interest rate on a balloon mortgage is also a little lower, too, which reduces your monthly payments even lower, bringing even larger savings. There generally are not any limits on interest placed on refinancing, such as there might be with a 30-year ARM, so you will be refinanced at whatever is the current rate. Refinancing is simpler, though, and, if it is in your contract, you will not need to be requalified, or the property reassessed, and fees will usually be minimal.
When a balloon mortgage becomes due, then full payment is expected. However, because there is so much left to be paid, most people are required to refinance in order to pay the balloon mortgage off. Whatever the interest rate is at the time, is the rate that you will have to take – there is not much of an option here.
If you are looking to buy a house, and stay for a short term, either less than the typical 5, 7 or 15 years, then you have a real good way to save some money. A balloon loan allows you to enjoy the lower
monthly payment rates, and you can sell it before the balloon payment becomes due. This gives you the perfect opportunity to buy an even a larger house for less. The only problem is if you decide you want to stay - then you must refinance.
Balloon mortgages are more commonly being used as a second mortgage now, in order to reduce monthly payments and save hundreds of dollars each year. If you do not have a 20% Downpayment when you apply for your mortgage, then you will be required to get private mortgage insurance (PMI). You can avoid this by getting a piggyback loan, one for 80% (first mortgage) and the other for 20% (balloon loan), and then you will not need to get the costly and unnecessary PMI.
It is even possible to get a larger balloon loan if you get it against the equity built up in your house. Another option would be for the purpose of projects around the house in the way of construction and remodeling – especially if you want to do it before you sell. When applying for a balloon loan you want to be sure to check out the various fees and compare several potential mortgages in order to see which one has the best deal for you. Also make sure that you get one without any penalties for paying it off early.