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What Will Your Balloon Mortgage Payment Be At The End Of The Term?
Are you considering a balloon mortgage?
Would you like to know how much you'll owe at the end of the term?
This Balloon Mortgage Calculator makes the math easy so you won't be surprised when that final payment (the balloon) is due.
Below is everything you need to know about balloon mortgages before you sign up . . .
What Is A Balloon Mortgage?
A balloon mortgage is a mortgage in which a large portion of the borrowed principal is repaid in a single payment at the end of the loan period. This large payment is called the balloon payment.
Balloon mortgages are often used when a borrower expects a large cash inflow as a result of refinancing or selling the property before the end of the loan term.
Just like any other type of mortgage, this loan type also carries some risk. Before you decide to take such a loan, make sure you'll be able to make the balloon payment before the due date.
Related: 5 Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
How Does A Balloon Mortgage Work?
Balloon mortgages usually have lower interest rates and monthly payments than conventional, fully-amortizing, fixed-rate mortgages.
However, when making balloon mortgage payments, the majority of each payment will go toward interest, not principal.
That's because while a balloon mortgage might last only seven years, the payments are calculated using a longer amortization period of 15 or 30 years.
Balloon mortgages are sometimes confused with adjustable-rate mortgages; however, they are very different.
The key characteristic of a balloon mortgage is a fixed loan term that is less than the amortization period creating a large, final, balloon payment.
The key characteristic of an adjustable rate mortgage (ARM) is that the interest rate can adjust up or down during the life of a full amortization period. The two loan types should never be confused.
What Are The Benefits?
Now that you understand how balloon mortgages work, consider the pros and cons to determine if a balloon mortgage is right for you:
- Balloon mortgages have relatively lower interest rates and monthly payments compared to other mortgages.
- Balloon mortgages allow the poor (or those with bad credit) to finance a home when more conventional mortgages may not be available.
- If you are a skilled investor then you can use the money saved from the reduced payment/interest to grow your investment accounts. Alternatively, you could use the extra money to pay off credit cards or other high-interest loans.
- Borrowers are often offered a non-negotiable predetermined refinance option in case they have difficulty with the balloon payment. In this case, the borrower will have a chance to refinance the loan with another lender, thus giving them an opportunity to negotiate a new loan at a better interest rate.
What Are The Drawbacks?
There are several situations where balloon mortgages can be risky:
- At the end of your loan term, you'll have to pay the hefty balloon mortgage payment. If you don't have the money to pay the balloon and can't refinance your mortgage then you may have to go through foreclosure and lose the house.
- If housing prices decline during the term of the mortgage it may be difficult or impossible to refinance without paying a substantial amount of money to restore the loan-to-value ratio – money you may not have.
- If you decide to convert your balloon mortgage into a conventional mortgage it is common that your new mortgage will have a higher interest rate and monthly payment.
- In case of default or foreclosure, you should expect that your credit score will suffer which will make it harder for you to obtain another mortgage in the future.
Final Thoughts
While balloon mortgages have low monthly payments, they can be a ticking time bomb – never forget about that large balloon payment at the end of the term.
If you are unsure that you will be able to handle the large payment at the end of the loan term, don't apply for this mortgage.
Use this Balloon Mortgage Calculator to discover how much you'll have to pay. If you feel hesitation in the slightest, consider a fixed-rate or adjustable-rate mortgage to reduce risk.
Balloon Mortgage Calculator Terms & Definitions
- Mortgage – The charging of real (or personal) property by a debtor to a creditor as security for a debt (especially in the purchase of property), on the condition that it shall be returned on payment of the debt within a certain period.
- Balloon Mortgage – A mortgage in which a large portion of the borrowed principal is repaid in a single payment at the end of the loan period.
- Balloon Payment – A repayment of the outstanding principal sum made at the end of the loan period.
- Default – Failure to fulfill an obligation, like a mortgage agreement.
- Foreclosure – The process of taking possession of a mortgaged property as a result of the mortgagor's failure to keep up mortgage payments.
- Mortgage Payment – A regularly scheduled payment which includes principal and interest paid by the borrower to the lender of a home loan.
- Adjustable-Rate Mortgage (ARM) – A mortgage whose interest rate is adjusted periodically to reflect market conditions.
- Fixed-Rate Mortgage – A mortgage whose interest rate does not adjust during the loan term.
- Loan Term – Period over which a loan agreement is in force.
- Interest Rate – An interest rate is the rate at which interest is paid by a borrower for the use of money borrowed from a lender.
- Principal – Denoting an original sum lent or the remaining balance on the loan.
- Refinance – Financing a mortgage again, typically with a new loan at a lower rate of interest.
- Amortization – The incremental and progressive repayment of principle over the life of the mortgage.
- Borrower – The person who borrows money with a promise to return it with interest.
- Lender – The person who gives money for interest with the expectation that the principal will be paid back.
Related Mortgage Calculators:
- Mortgage Payment Calculator With Amortization Schedule: How much will my monthly mortgage payment be? Includes taxes, insurance, PMI, and printable amortization schedule for handy reference.
- Mortgage Payoff Calculator: How much extra payment should I make each month to pay off my mortgage by a specific date (and how much interest will I save)?
- Bi-Weekly Mortgage Calculator: How much interest will I save paying my mortgage biweekly instead of monthly? How much more can I save if add an extra payment?
- Mortgage Balance Calculator: What is my mortgage balance given the number of payments I've already made (or still need to make)?
- Mortgage Refinance Calculator: How long will it take to break-even on my refinancing costs and what will be my total interest savings?
- Interest Only Mortgage Calculator: How much lower will my payment be on an interest only mortgage compared to a conventional principal and interest mortgage?
- Second Mortgage Calculator – Consolidate Savings With Refinance: How much will I save consolidating my first and second mortgages into a new first mortgage?
- Rent vs. Buy Calculator: Should I rent or buy? What's the better deal?
- Mortgage Affordability Calculator: How much house can I afford if I paid the same amount in mortgage as I pay in rent?
- ARM Mortgage Calculator: How does an adjustable rate mortgage (ARM) compare to a fixed rate mortgage over the life of the loan (as opposed to just the teaser payment)?
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