The home mortgage industry has come a long way, and borrowers today have a huge variety of products and arrangements. Alternative mortgages are those home loans that don’t conform to conventional mortgage terms. Balloon mortgages are a typical example of alternative mortgage options that are extremely flexible, but also very risky if you’re not sure of what you’re getting into. You should consult many books about various kinds of mortgages before getting a mortgage.
A balloon mortgage usually lasts for a period of five to seven years, and allows the borrower to make small payments for the duration of the mortgage and then close it with a lump sum payment. For example, if you take a balloon mortgage for $150,000 and pay $30,000 over the five-year term, you would be expected to pay the balance of $120,000 once the period ends.
Balloon mortgages are attractive propositions to home owners who know that they will be leaving the place in a few years time, like in transferable jobs, and are not interested in building their equity in the home. It is also a good choice if the borrower is very sure that his income will improve drastically in a few years, and prefers to leverage his money for other purposes now.
In reality, many borrowers do not have the lump sum on hand when it falls due. The option then is to refinance, or go for a new mortgage. It may not be possible at that time to get an affordable loan, especially if interest rates rise in the meantime. In case property values fall, and you’re unable to sell your house as planned, you could also find yourself at the receiving end of a bank foreclosure.
Balloon mortgages offer a good combination of smaller payments and low interest rates to home buyers who prefer to channel their funds into other uses. However, the risks involved can also balloon into huge setbacks, so borrowers should use this option with care.