Budget Your Own Payments With Balloon Mortgages

If you are not on a fixed income and you want to purchase a home, probably balloon mortgages are the right loan type for you. These loans will require of you only small loan installments every month and a final lump sum payment at the end of the repayment program. Thus, you will be able to put aside every month a variable amount of money according to your income so you can finally afford the last payment.

Balloon loans are ideal for those that do not have a steady job and thus can not afford a fixed high monthly payment every month. Balloon mortgages provide a lot of flexibility as only minimum payments are necessary during the repayment program that usually consists only of interests and a small portion of the capital. However, at the end of the term or due date the borrower will have to cancel the remaining capital all at once.

Balloon Mortgages: How Do They Work?

Balloon mortgages are just like regular mortgages. They are secured loans guaranteed by a property. The difference between regular mortgages and balloon mortgages is the fact that the loan installments are significantly lower. This is done by reducing the amount of principal that integrates the loan payments which remain almost only composed of interests.

However, in order to compensate for this lack of principal repayment, at the end of the repayment program, the borrower will have to pay a lump sum equivalent to the remaining of the principal that is still owed to the lender. The amount of this payment will depend on the percentage of principal that integrated the balloon mortgage monthly payments.

Flexible Repayment

As explained above, the amount of the monthly payments on a Balloon mortgage loan are extremely low compared to regular home mortgages installments. However, though the borrower is only obliged to make these small payments, nothing prevents him from destining a higher amount towards debt repayment in order to reduce the amount of money he will have to put down on the loan's due date.

This flexibility provides the applicant with the ability to control his repayments and thus have financial freedom to use his income for other purposes when needed and destining it to debt repayment when the rest of the expenses are not that high. This is particularly useful for those that do not have fixed earnings like salesmen with commissions being a very important part of their income.

Risk Of Repossession And Refinancing

If you can not put the lump sum down when the loan is due, you may be risking repossession of the property and thus lose what you have been working for during a long time. This is why you need to be extra careful when requesting a balloon mortgage so as to see that you will be able to have the money when the balloon mortgage loan is due.

However, if that is not the case, you can always refinance the balloon mortgage loan and obtain a regular mortgage loan with a new repayment program with affordable installments. This will imply a longer period of time till you fully become debt free but you will not suffer the consequences of defaulting on the loan that can include repossession and bankruptcy.