Ways of Satisfying a Balloon Mortgage, Benefits, and Refinancing Risks

A balloon mortgage is considered a risky borrowing product because customers face a significant obligation at the end of the repayment term. Consumers who are unable to satisfy their mortgage are often forced to refinance.

Refinancing Risks

One of the problems with refinancing is that some consumers cannot raise sufficient funds by borrowing and are considered insolvent. Some debtors sell their assets and home at discounted prices to pay off their debts. There are different ways to go about refinancing, and one is to extend the repayment term. The problem with this solution is that borrowers pay more in interest when the repayment term is longer. The lifetime and monthly payments are higher. With refinancing, customers start from scratch instead of paying down the principal. This is because a large amount of the monthly payment goes toward interest charges during the initial period. Then most of the monthly payment goes toward the principal to satisfy the loan. Customers who opt for a balloon mortgage and are unable to repay the principal as a lump sum face refinancing risks. Refinancing costs a lot of money in closing costs. Customers pay for appraisals, credit checks, filings, legal documents, and more. Some loan providers offer no closing cost mortgages but this is more of a marketing trick. In fact, borrowers still pay closing costs such as survey and title service costs, application and attorney fees, points, inspection and recording fees, taxes and insurance, and more. Brokerage commissions and transaction stamps add to the cost of borrowing. Mortgage refinancing is also used as a method to consolidate multiple and excessive debts. While borrowers often benefit from a competitive interest rate, there are drawbacks, and one is that tax benefits are not available in all cases. Some borrowers find it hard to meet their payments because their loan balance is larger. Some loans also come with special protection,

but refinancing changes this, and borrowers lose protection. Note that a balloon loan is not a good choice for customers who want to build equity. The reason is that monthly payments go toward the interest charges. Home equity is beneficial in a number of ways, and one is that consumers are allowed to borrow against their home equity. They are offered secured loans and revolving credit, including home equity lines of credit and loans.

Benefits for Consumers

Consumers benefit from the fact that balloon mortgages go with affordable monthly payments and lower interest rates compared to standard loans. A further benefit is that many borrowers get approved for a larger loan compared to fixed and floating rate mortgages. Customers who expect wage increases and large amounts of money in the future often opt for this type of loan. Homeowners who plan to sell the property in a couple of years also apply for a balloon mortgage. The monthly payments may become unaffordable, however, if the rates increase or the customer’s credit rating suffers. In this case, borrowers have few options left, and many choose to refinance.

Ways of Satisfying a Balloon Mortgage

Obviously, the best scenario is to pay down the balance before the repayment term is over. Customers either repay the principal or the outstanding balance, depending on the terms of the agreement. If the borrower is unable to satisfy the mortgage, one option is to sell the property. Another is to refinance and repay the outstanding balance. A third option is to convert to a standard mortgage, and this can be a good solution if the current rates are low. Some mortgages also come with a reset feature but there are certain requirements to meet, and one is timely payments.

Other Options and Factors

If a balloon mortgage looks like a high risk, there are plenty of other options, including variable and fixed rate loans, 2-step, closed, open, and first mortgages, all inclusive and preapproved mortgages, and others. In addition to these types, many issuers offer convertible, equity, and high-ratio mortgages and secured lines of credit. Look at factors such as the amortization period, floating vs. fixed rate, loan purpose (renovation, new construction, etc.), and others.

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