A balloon mortgage is, quite simply, a short-term mortgage loan. Although it is set up with fixed monthly payments like any other short-term loan, it ends with one large final payment of the loan balance, or the “balloon.” This type of mortgage is amortized through the loan repayment period with small monthly payments, however when the period comes to an end, the balance is due in full. Checkout www.emetropolitan.com/what-is-a-balloon-mortgage/ for more info.
When reaching this point, many borrowers choose to refinance. This is what makes a balloon mortgage so similar to an adjustable rate mortgage (ARM). Nevertheless, there are differences, both advantages and disadvantages, which lead borrowers in their decisions regarding loans and homeownership.
Many borrowers prefer the balloon mortgage due to its similarities to a long-term fixed rate mortgage. Much like a 30-year fixed rate mortgage (FRM), the balloon mortgage is simple and calculated as if over a thirty year period. Even though with the balloon mortgage, a large sum is due after seven years, it is simple and not overrun with the complex loan contracts associated with adjustable rate mortgages. In addition, balloon loans are, generally, less expensive. Lenders are more willing to finance a mortgage that will fully adjust to the market after seven years.
On the other hand, there are some advantages to the ARM over the balloon mortgage. For one, a balloon mortgage is more likely to fall victim to interest rate explosions. Secondly, with an adjustable rate mortgage, once the lender and borrower have signed a contract, the deal is sealed. If for any reason, the borrower’s credit deteriorates over that seven year period, it has no effect on the loan itself. However, with a balloon mortgage, the lender’s commitment to refinance the loan after seven years depends greatly on the reliability of the borrower.
Really, in the end, the choice between a balloon mortgage and an adjustable rate mortgage depends on the independent needs of the borrower. With long-term mortgages, 15-year balloon mortgages, and countless ARM contract arrangements, all available as well, the options are endless.