Author: Arek Zbikowski
This type of mortgage loan is also referred to as partially amortized loan. This means that balloon payment mortgage allows you to amortize part of your liability and pay the remaining part at the end of the term. In other words, you make a balloon payment when the term of your loan comes to an end. This is a lumpsome amount that you pay to clear your loan.
Because of the large payment made at the end of the term, balloon payment mortgage has the advantage of offering lower interest rates and monthly payments.
Balloon payment mortgage loans get their name from the fact that the borrower makes a balloon (or large amount of) payment when the term of the loan expires. The monthly payments mostly go towards the payment of the interest, with at times a small percentage covering the principal loan.
This is where it is different from the other mortgages, whereby the monthly payments cater for both the interest and principal loan. As a result, when the term of the loan comes to an end, there is no debt remaining. In balloon payment mortgages, the end of the term finds when there is still some amount pending, which, never the less, will be due for full payment.
The monthly payments in balloon payment mortgages are low considering that you mainly just pay for the interest. At the expiry of the term, you will be required to pay the principal loan in full.
There are a number of instances where you may need to take a balloon payment mortgage. For example, you may take a thirty-year mortgage that you instead have to pay off within a short period of time, say five years. If you go for a thirty-year balloon payment mortgage, you will pay a lower rate of interest than if you opted for a conventional thirty-year fixed-rate mortgage loan. In such a case, your monthly payments continue to be amortized in line with the thirty-year duration. However, at the end of the shorter term (five years), you will have to make a larger payment to cover the remaining debt.
If you would like to make the most of your balloon payment mortgage, you need to take some factors into consideration. For example, you should see to it that the end of the term, when you will be required to make the balloon payment, is not too close. In case you will not be able to make the full payment at the end of the period, you risk facing foreclosure and thereby lose your home. Although some companies will accept to give you more time to make your payments, you will have to pay a higher interest rate. The new rates of interest will be calculated on a conversion formula that you may not necessarily qualify for.
About the Author:This article was written by Arek Zbikowski. For more information on balloon mortgages feel free to visit my site at www.atozmortgageguide.com.
Article Source: http://www.articlesbase.com/mortgage-articles/more-about-the-balloon-mortgage-674043.html
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