Balloon Home Loans - Be Careful

In this modern economy, lenders supply loans tailored to just about any situation. Balloon loans are one such as loan, but carry a serious downside if you’re not careful.

Balloon Loans

A balloon loan have nil to make with hot air or floating around the human race in 80 days. Fail to program very carefully when using one of these loans, however, and your financial human race will definitely travel down in fire like the Hindenburg.

A balloon loan is a mortgage with a fixed interest rate for a set time period of years. Unlike traditional fixed rate home loans, the interest rates on balloon loans are nearly as low as those establish on adjustable rate mortgages. The problem with balloon loans, however, is the term.

While balloon loans supply a low fixed interest rate for a set time period of years, those old age are not in abundance. Instead of a 15 or thirty twelvemonth repayment term, a balloon loan typically have a term of seven to 10 years, depending upon what the lender was willing to give you. At the end of the term, you must refund the balloon loan in full. Yes, in full. Let’s take a expression at how this tin drama out.

In 2005, you happen a home you love but can’t measure up for a loan. You are so engrossed with the loan that you eventually turn up a lender willing to compose you a balloon loan. The loan is for $400,000 and have a 7 twelvemonth term. At the end of the seven years, you’ve paid the loan down by $50,000, but still owe $350,000. Somehow and someway, you must come up up with that $350,000 to pay off the loan. If you don’t, the lender will foreclose on the home.

Every borrower that travels with a balloon loan fully means to refinance the property before the balloon blows. While this do sense, you have got to maintain in head that refinancing is no certain thing. Maybe you can, but maybe you can’t. Also, we are experiencing some of the lowest loan rates every seen. Chances are very strong that in seven years, rates are going to be much higher. Are you really going to be able to afford those rates?

Balloon home loans are all about seeing the future. In essence, you are pulling out the tea go forths and betting on rates in 2012 or so. If you get it wrong, your financial life can go a nightmare.