Posts tagged Balloon Loans
Can You Refinance a Balloon Mortgage?

Can you refinance a balloon mortgage? Thankfully, you can. And unless you’re simply rolling in dough, you may be forced to refinance. A balloon mortgage is a home loan with a short term, often 5 - 7 years, after which the rest of the loan is due in one large payment, called a balloon payment. Since most people don’t have this balloon payment sitting in a Swiss bank account somewhere, they usually either refinance the loan, convert the loan to a fixed-rate mortgage, or sell the home before the payment is due.

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What is a 5-Year Balloon Payment?

When it comes to getting a traditional home loan, most home loans are fully amortized, meaning that each payment a borrower makes goes to paying off both the interest and the principal. At the end of the loan period, the entire loan is paid off. Some loans, like balloon loans, are not fully amortizing -- meaning that there is still money due at the end of the loan period. One kind of balloon loan, a five-year balloon loan, has a loan life of 5 years. At the end, the borrower must make a large payment (known as a balloon payment) in order to repay the mortgage.

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How Do Balloon Payments Work?

A balloon payment is a large payment due at the end of a balloon loan. A balloon loan is a short-term mortgage, often lasting between 5 and 7 years, but with a payment plan typically based on a 15 or 30-year mortgage. At the end of the mortgage, the borrower still owes the rest of the unpaid principal and is required to pay it as a lump sum. Since most borrowers can’t afford this, they typically either sell the home or refinance the balloon loan before the balloon payment is due.

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What is a Balloon Home Loan?

A balloon loan is a type of mortgage that doesn’t fully amortize over the life of the loan, leaving a large “balloon payment” due at the end of the mortgage. Home loans with balloon payments have lower monthly payments in the years leading up when the balloon payment is due, but the size of many of these payments often makes it difficult (or impossible) for borrowers to pay them off. For example, many balloon loans have a term of 5 to 7 years (after which the balloon payment is due), while the regular, monthly mortgage payments are based off a 30-year loan term.

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A Complete Guide to Balloon Mortgages

Balloon loans are usually short-term and only a small portion of the principal will be paid by the end of the term. They look something like this, a $400,000 loan is to be amortized over 30 years but due in 5 years. The borrower will make payments like they are on a 30-year amortized payment plan, but the loan will be due in 5 years. The amortized payments will pay for mostly interest and a small portion of the principle, the balloon payment is likely to be close to the principal.

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