Balloon Mortgages - What You Need to Know

This article will go over the basics of balloon mortgages - explaining how they work, the benefits and drawbacks of balloon financing and how you can apply for one. Keep reading to learn more.

What are balloon mortgages?

Balloon financing is intended to be short-term financing, but the initial monthly payments work like a fixed-rate mortgage. Basically, a balloon mortgage has a short term loan agreement, from just a short year to a more typical term of five or seven years, but the total amount borrowed reflects a longer term loan.

In such an agreement, the remaining balance is due at the end of this short term. So, while the regular payments would typically match that of a fixed-rate mortgage, the remaining balance is due as the final payment, meaning the last payment is your "balloon" payment. Balloon financing is popular for people dealing with commercial or investment real estate properties, but not usually residential properties.

How do you apply for one?

First, ask at the financial institution to see if they offer balloon financing options. If so, you can proceed with the application. If you're familiar with the loan application process, you'll find that applying for a balloon mortgage is similar - you'll need to provide the same documents and sign similar forms as in other borrowing situations.

What do I need to know when applying for a balloon agreement?

Before you sign anything, make sure you have a clear understanding of exactly when the balance is due and how much your final, balloon payment will be. You will pay part of your balance in payments over the course of your term, but once that term is up you will be required to pay the remainder in full.

Can I refinance at the end of the loan?

This is a question you should ask your lender before you agree to any terms. Typically, there is an option to refinance your final payment, provided there have been no late payments or liens against the property. Check with your lending institution to find out what conditions you must meet in order to retain your refinancing options.

Do I need to prepare for a worst-case scenario?

Before agreeing to a balloon mortgage, you need to analyze all the worst-case scenarios to make sure you can handle them. Whether it's losing your job, not being able to find a buyer on an investment property or a general downturn in the economy, will you still be able to maintain the payments (including the balloon payment) on the property? If not, you may want to consider other financing options.

I've gone over every detail and I feel confident - what now?

The next step is to file for the loan. Again, be sure you understand all the requirements and never be afraid to ask questions. Once you're ready, you can sign the application form with confidence and proceed with your financing.

It is not uncommon for enthusiastic buyers to enter a balloon agreement with undue confidence in their ability to repay the final payment at the end of the loan term. So weigh the balloon option with a sober mindset before signing a contract.