i was just wondering if anyone knows how a balloon loan works, is it a good loan?
2007-03-12 09:17:25 · 5 answers · asked by no picture 2 in Business & Finance ➔ Renting & Real Estate
It is a good loan to get in trouble with.
Basically it is used when someone cannot afford the full payment on a very large balance. You basically pay interest only for a set number of years then you refinance the balance (balloon) when they tell you that it is time.
If something happens between now and then (you lose your job, get hurt, go nuts, whatever) and you can't get refinanced, you could be in a bad spot. Or not.
2007-03-12 09:22:44 · answer #1 · answered by Gem 7 · 0⤊ 0⤋
Basically it means the term is shorter than the amortization. For instance a 5 year loan term with a 30 year amortization.
In other words, your loan payments will be on a schedule to pay off your principal in 30 years, but the loan will become due in 5 years. Leaving you with a Balloon payment.
It can save you money on your interest rate because it is a less-risky loan for a bank because they are only lending the money for 5 years, not 30 years.
Or, if the economic life of a property is less than 30 years, a bank might opt for a balloon loan. This allows the borrower to keep his payments low, but reduces the risks for the bank.
The danger for the borrower is when that loan comes due. It can be a very expensive balloon payment. If you can't pay it, then the bank can foreclose on your property. One way to pay off the balloon payment is to refinance your property with another lender.
If you don't plan on making the balloon payment or selling the property, then you should look to refinance your loan about 6 months to a year prior to the due date of your balloon payment. This way, if anything goes wrong with the loan process (e.g. - mandatory repairs after an appraisal or inspection) you'll have plenty of time to get them done. It will also save you a lot of stress.
2007-03-12 10:35:33 · answer #2 · answered by Anonymous · 0⤊ 0⤋
Well, basically what happens is this:
Say you want a loan for 150,000 and you get a 7% interest rate for 30 years, your monthly payment would be about $998.
However, if you want to lower your monthly payment you can stretch the mortgage out for 40 years, so your monthly payment would be $932 assuming your mortgage was for 150,000 at 7% for 40 years.
What some mortgage companies are doing is giving people a 30 year loan, but scheduling payments like it is a 40 year loan. Sounds good, right? WRONG!!!!! What happens at the end of 30 years is that you will have a balance due of approx. $24,000 before your mortgage will be considered paid off. That is the difference between paying 998 for 30 years and paying 932 for 30 years. Most people will not have the money at the end of the 30 years to pay the mortgage off. It's better to just accept the higher monthly payment.
I have been a loan officer for a while now and it is NEVER a good idea to do a balloon loan. Send me an e-mail and I might be able to help you get a conventional loan that will fit your budget.
2007-03-12 09:32:49 · answer #3 · answered by Amber J 2 · 3⤊ 0⤋
The Balloon mortgage is another type of loan program available to real estate buyers, which has contract features that can be attractive to borrowers, but also dangerous. The combined total of all monthly bills paid on a Balloon loan will not equal the total amount due on the loan by the end of the term, a scenario called Negative Amortization.
2007-03-12 09:25:27 · answer #4 · answered by Indiana Frenchman 7 · 0⤊ 0⤋
A balloon loan is for a fixed period of time like 5 or 7 years and then the entire balance comes due at the end of that period. You just have to make sure that you refinance that loan before it comes due.
2007-03-12 09:25:34 · answer #5 · answered by Akbar B 6 · 1⤊ 0⤋