In the current financial climate, more and more people are opting for balloon mortgages. That is understandable given the advantages that they offer, not least their ability to make life easier.
These difficult financial times have made it necessary to juggle the demands of modern living. When it comes to buying a home, the biggest challenge is to make sure the monthly repayments are met. Thanks to balloon mortgages, that challenge is being met more easily by a growing number of home owners.
The whole concept of these mortgages is to make repayments more manageable. With normal mortgages, the lender will have set out a strict schedule of repayments where interest and a percentage of the principal sum borrowed will have to be repaid. But the monthly payments are significantly lower because the percentage of the principal is greatly reduced.
Of course, this does not mean that the principal sum is ignored. Unfortunately, a large lump sum must be paid at the end, in effect leaving one balloon payment, so to speak, at the end of the mortgage term. Thus, the name. However, despite this fact, repaying balloon mortgages brings with it advantages that are too good to pass up.
The main advantage of course, is the most obvious one. The monthly payments are much lower compared to those of a regular mortgage agreement. Since balloon mortgages leave a large portion of the principal to be paid at the end of the term, it means that the interest and a small percentage of the loaned sum is due.
For example, where a regular mortgage may demand repayments of USD5,000, including interest of USD125, the terms for repaying balloon mortgages could see the total fall to USD4,000. The USD1,000 difference is deferred, allowing the borrower to use the extra money to manage other aspects of living.
The second advantage is flexibility, which is central to the mortgage concept. It means that the borrower is in much more control of their payments than with alternative agreements. The reason for this is that there is only a minimal amount strictly due each month, and after that more can be paid to aid in the reduction of the overall sum.
So, if a home owner happens to enjoy a sudden boost in monthly income, then he or she can add a large additional sum to that monthly payment. An inheritance, for example, of just a few thousand dollars will help to reduce the size of the lump sum at the end of the mortgage term.
What is more, lenders of balloon mortgages are more open to restructure payments than with other mortgages.
But with every blessing comes responsibility, so there are some negative aspects that must be considered. The biggest disadvantage to balloon mortgages is that the borrower faces a large final payment at the end of the term. This means that, if the home owner is not putting some money away over the course of the mortgage, then they will find themselves in a difficult financial situation.
The answer is to regularly save so as to balance off the monthly payments, which raises the argument that the savings made each month are not as significant as first thought. In all likelihood, a second loan will be needed to repay the final sum, effectively creating another debt.
Nevertheless, repaying balloon mortgages is easier for borrowers, and allows a quality of life to be enjoyed. And that is a highly attractive prospect for everyone.