Balloon Payment
Financing a property with a balloon payment means a shorter financing term and lower monthly payments, with a large lump sum due several years after the purchase. Since many balloon payments are due within 5 to 7 years of the loan being originated it can be daunting unless a consumer is aware of the options available to them once the bank calls the lump sum due.
Lump Sum Settlements
Of course the simplest way to pay off a balloon payment is to do just that; pay it off. If a consumer has the available financial liquid assets to pay off a balloon payment mortgage they will own the property free and clear, without having to make continued monthly mortgage payments.
Selling the Property
Another option to clear the balloon payment mortgage would be to sell the property. In this scenario the owner would retain all proceeds that they had built in equity over the balloon term minus the total settlement fee for the balance of the mortgage paid to the lender.
The net proceeds for the seller can be surprisingly good in this scenario, providing house prices continue to rise. Since balloon payment mortgages offer lower interest rates than conventional loans a home owner with a balloon payment mortgage can build just as much equity in 7 years than a conventional home buyer can in 13 - 15 years. A balloon payment mortgage is an excellent option for a person who is relocated on a consistent basis.
Refinancing
Home owners can choose to refinance the balloon payment to another type of mortgage when the lump sum payment is called due. The owner can choose any loan product that they are eligible for in a refinance which will typically be one of three loan products: FHA, VA or Conventional loans. There is a credit, income and debt qualification that the home owner would have to meet in order to be considered for any type of refinancing products.
When a owner refinances a balloon payment mortgage there is no equity stipulation as there would be on any other type of refinance. As a matter of fact, the owner has the option of re-amortizing the loan to a 30 year note to keep the payments lower, while continuing to build equity in the property over time. Or the owner can refinance the remainder of the note for 23 or 25 years, keeping the equity built up over the initial term.
Converting
The home owner can also do a conversion of a balloon payment loan into a conventional loan. The home owner would have to re-qualify for the conventional loan that they wanted to obtain and in many cases would be expected to have a small down payment.
A loan conversion is simply extending the terms of the balloon payment loan while inflating the interest rate to whatever the going conventional market rate might be. This doesn't reset the clock or any terms of the original mortgage, it simply increases the monthly payment, so it is unlike a straight refinance.
Expert Insight
A real estate transaction can be one of the largest investments that a person will ever make. When choosing a loan product it is not wise to leave all research to the Internet or friends' recommendations. Talk to a mortgage banker or mortgage broker, and have different options presented to you on paper so that you can see the difference. Making the wrong mortgage decision could cost you.
