Risk Versus Benefit In Balloon Home Loans
A balloon home loan is a type of short term loan set at a low, fixed interest rate. After the period of the loan, usually about ten years, the loan matures. The borrower must then pay the principal of the loan in a single lump sum. Balloon home loans are very short term home loans ending in a large lump sum payment. These types of loans of necessity involve some calculated risks.
Balloon home loans may not benefit the vast majority of borrowers. Because of their calculated risks, they are ideal for only a few. At the end of the loan period, any money not yet repaid must either by paid out all at once, or the loan must be refinanced. Some can benefit from this type of loan. Those who flip, or buy and resell homes, often do not intend to keep the homes as long as the term of the loan. They also often receive large amounts of money at once when their property sells. Since the fixed interest rates for balloon loans are very low, this kind of buyer can benefit greatly.
If you intend to keep your property for a long time, you will not benefit as much from a balloon home loan. The short term of the loan is often not enough time to repay the full sum of the loan, and if refinancing or the lump sum are not available at the end of the term, you run the risk of losing your home. If there is an increase in interest rates, borrowers using balloon loans who cannot pay them off at the end of the term also run the risk of a hike in their payments.
To determine the utility of a balloon home loan for your needs, you must consider what you intend to use it for. Also, you should examine how long you are intending to keep the home. If you are considering the use of a balloon home loan for the short term, with plans to later refinance, you must be aware that there are some risks involved. There is some possibility that you would not be able to refinance, thus losing your home.
No loan is good or bad. Different loans are simply built for different borrowers and different lending situations. Most people looking for a short term solution to their mortgage difficulties will be able to benefit from a balloon home loan. Those seeking a more stable solution will find that the risks of a balloon home loan outweigh the benefits.
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