Balloon Payment Mortgage
The payment calculation of a balloon mortgage is identical to a fixed-rate mortgage, usually a 30-year Fixed Rate Mortgage. However, this is all they have in common. If a conventional Fixed Rate Mortgage is expected to be repaid in 30 years, the completely amortizing final payment on a balloon mortgage is due at the end of the 5th or 7th (depending on the contract) year. For 5 (7) years your monthly payments are equal to those of a 30-year Fixed Rate Mortgage, which usually means lower interest rate, a stable predictable amount to pay, no fuss about the market changes in interest rates, the balance of your mortgage is gradually decreasing. This heaven ends when the payment day comes. You have to pay off the 25-year-big remains of your debt in one go. Here I want to note, that the payments you have been making for 5 (7) years have not decreased your balance significantly, as in any Fixed Rate Mortgage’s early years the proportion of money paid towards the interest is a lot higher than the amount paid towards the principal. Now, how good or bad is it?
It can be pretty good, actually, if you are in a situation for which a balloon mortgage can be recommended: you were not planning to own the property longer than 5 (7) years and you stuck to the plan.
In all other “inadvisable” situations you do have to either pay off somehow or refinance. Leaving the pay off option to your personal creativity, I will say a few words about the refinancing. Read the rest of this article »
