Are Balloon Payment Mortgages Coming Back?

Many people don’t even know what a balloon payment mortgage is, but I’ve been seeing a number of articles about them lately, which leads me to believe they’re coming back into style again.

A balloon payment mortgage is where your payments are still amortized over a thirty year period, but the life of the loan is typically five to seven years. Which means when the life of the loan expires, you’re expected to either pay the lump sum of the balance of the mortgage, sell, or refinance into another mortgage product.

Why would someone do this? Well, there’s a variety of reasons. Maybe you’re not planning on staying in a home for that long. Maybe you’re a developer or house flipper. Or maybe you’re working on commissions, and you expect to be able to pay off way more than what’s owed in that five to seven years.

But it’s a gamble. Plans change. Rates change. Life changes. Do you know for certain what rates will be in five years? Seven years? They certainly can’t be much lower than they are now. Are you sure you’ll be able to sell your home in five to seven years at a profit? Are you sure you’re getting those commission checks? It’s risky, and not for the normal real estate purchaser, but there are big upsides. For example, if your credit isn’t the greatest, you may be able to qualify for one of these loans, make on time payments, and then refinance to another loan after building your credit.

If you do opt for one of these loans, make sure that you communicate with your lender prior to the balloon date, or refinance, or pay off, or whatever. Because poor planning in this instance, or waiting until the balloon date has passed, can be catastrophic to your finances.