Should You Opt for Balloon Mortgages?
Worried about monthly mortgage payments because of an unstable income? Don’t worry- you can easily go for balloon loans, as they are specially designed for people who are unable to afford a fixed high monthly payment. There is quite a bit of flexibility because minimum payments are required during the repayment program only – it comprises just of interest and a small part of the capital. But the borrower needs to cancel the remaining capital at one go when the term ends.
How do balloon mortgages work?
They are not too different from regular mortgages – basically they are secured loans where the guarantee involves your properly. In case of balloon mortgages, the loan installments are considerably lower. The principal amount is reduced which combines the loan payments that remain mostly made up of interests. The only disadvantage as mentioned before is that at the end of repayment program, the borrower has to pay a sum equivalent to the remaining principal amount that he still owes to the lender. This sum depends on the percentage of principal that integrated the balloon mortgage payments on a monthly basis.
Better flexibility and control
The amount of monthly payments on a balloon mortgage loan are way lower than regular mortgage installments, but a borrower can choose to pay a higher amount as well, since this helps to decrease the amount of money he has to pay at the end of the term. The financial freedom associated with a balloon mortgage is much more as is the option to control the repayments better. The borrower can use his income for other important purposes and delegate some of it to debt repayment when other expenditures are not so high.
Risk associated with balloon mortgages
Although balloon mortgages are a suitable alternative for those who don’t have fixed incomes, there is a risk of repossession of the property if you can’t clear the remaining amount when the loan is due. That is why you need to be extra careful while calculating your monthly payments before applying for balloon mortgage. Figure out in advance if you can afford to clear the remaining amount when the repayment program is over.
Another option is to refinance the balloon mortgage loan by going for a regular mortgage loan with a new repayment program. Ensure that the monthly installments for this new mortgage are reasonable and doesn’t stretch you too thin. It will take you a bit longer than usual to be free of debt, but you will not have to worry about repossession and bankruptcy in case you default on the loan!