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Balloon Payment Mortgage
The other term for a balloon payment mortgage is a partially
amortized loan. Balloon payment mortgage is when your
liability or obligation is only partially amortized,
leaving the rest to be paid upon the completion of the
term. Because the initial interest rates and monthly
payments are lower, a balloon payment mortgage is paid
off with one large payment at the end of the loan term.
Balloon payment mortgages are called such because borrowers
who are on this type of loan are usually set up for
a “balloon” payment at the end of their loan term. In
most other loans, monthly payments do not only pay off
the interest but also chip away at the principal amount
– the original amount owed. Thus at the end of each
loan term where balloon payment mortgage is applied,
no money is owed.
With balloon payment
mortgages however, the monthly payment only comprises
of interest or a combination of interest plus a small
amount for the principal. No matter the case, when the
balloon payment mortgage term expires, the balance is
due in full.
Most second mortgages are commonly balloon payment mortgages.
For instance, your balloon payment mortgage is $20,000
with a monthly interest-only payment set up for ten
years. When your balloon payment mortgage term ends,
you still have to pay for the $20,000 principal amount.
There are a couple of accepted institutional loan products
that have balloon payment mortgages. One of these balloon
payment mortgage products is the 30-year loan that has
to be paid off in five or seven years.
Usually, the interest rate of the 30-year balloon payment
mortgage is lower than a normal 30-year fixed rate mortgage
with due date of 30 years. Monthly payments of balloon
payment mortgage are still amortized based on the 30-year
term. But at the end of five or seven years, a large
amount of the balloon payment mortgage is due.
To explain further on this, let’s say you have a balloon
payment mortgage with an interest rate of 7.5%. After
seven years, an approximate 92% of the original balloon
payment mortgage amount is due.
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For example, the amount
of the balloon payment mortgage is $200,000. The interest
rate for this balloon payment mortgage is 7.5%. After
seven years, the total amount of money you owe to the
balloon payment mortgage lender is $184,000, provided
that you haven’t sold the property yet or refinanced.
A tip for home borrowers
is that when you do take on a balloon payment mortgage
makes sure that the due date is not too soon. With balloon
payment mortgages, if you can’t pay the lender the amount
on the due date, you might have to foreclose and lose
the property.
Some lenders offer extensions for their 30-years-due-in-7
balloon payment mortgages. Lenders of this type of loan
may extend your balloon payment mortgage for another
23 years but with a new interest rate. These balloon
payment lenders base their new interest rates on a conversion
formula. In this case, you might have to re-qualify
for the balloon payment mortgage should the new interest
rate on the mortgage being converted is significantly
higher than the old rate.
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