When it comes to mortgage options, a balloon mortgage can sound like a great option. After all, who wouldn’t want to make smaller payments over a longer period of time? While this kind of mortgage can seem attractive, it’s important for homeowners to understand that there are some risks associated with it.
First and foremost, with a balloon mortgage, the homeowner will be making smaller monthly payments than what they would with a traditional fixed-rate mortgage. This means that the homeowner will be paying less each month and will have more money in their pocket for other expenses. However, this also means that the homeowner is not paying down the principal on their loan as quickly as they would with a traditional fixed-rate mortgage. This means that when the balloon payment comes due at the end of the loan term, the homeowner may be left owing more than they would have if they had opted for a traditional fixed-rate mortgage.
Another risk associated with balloon mortgages is that they often come with adjustable interest rates. This means that while your payments may start out lower than they would with a fixed-rate loan, they could go up over time as interest rates increase. This could leave you paying more than you were expecting when you took out your loan and could even put you in danger of defaulting on your loan if you cannot afford the new higher payments.
Finally, another risk associated with balloon mortgages is that there is often no way to refinance them when the balloon payment comes due. This means that if you are unable to make the full payment at that time then your only option may be to walk away from your loan and suffer damage to your credit score as a result.
For these reasons, it’s important for homeowners to carefully consider all of their options before opting for a balloon mortgage. If you do decide to go this route then it’s important to make sure that you are able and willing to make the full payment when it comes due and that you are prepared for any potential increases in interest rates over time so that you can budget accordingly and avoid any financial difficulties down the line. Additionally, if possible try to save extra money each month so that if needed you can pay off your loan sooner or take advantage of an early payoff discount from your lender should one become available in order to save money on interest payments over time.