Balloon mortgages are typically short-term loans with a low interest rate. However, what makes these loans different than others is that the last payment is much larger than the others. Often, that final payment is at least twice as large as the regular monthly payments.
Though this may be a convenient choice at the moment you are considering buying a home, it can be disastrous if plans do not work out like you assumed they would.
Balloon mortgages are often used by young, first-time homeowners. The low monthly payments allow them to get on their feet as homeowners and build up a good financial foundation, while still having a house to their name. The assumption is that, by the time that final payment comes, they will have advanced far enough in their career or otherwise had enough time to save up enough money to pay off the loan.
If that plan does not work out, some homeowners will attempt to sell their house or refinance to avoid defaulting on their balloon mortgage. However, if the value of the property has fallen, or the borrower’s finances are in such a state that refinancing is not an option, the bank may repossess the house.
Unless a borrower is absolutely certain they will be able to pay off the final balloon note, it is usually advised to choose a different kind of mortgage. If you are unsure what kind of loan is best for your situation, an experienced real estate agent may be able to provide some advice.