A balloon mortgage is a short term loan, which unlike a regular mortgage, isn't paid off entirely in monthly payments. Instead, you are left with a portion of the principal amount, which then has to be paid off in a lump sum. This outstanding amount is also sometimes known as a balloon payment. Most balloon mortgages sometimes called bullet loans have a term of between five and seven years, although 15-year terms have also become more popular in the last few years.
Qualifying for a balloon mortgage may be easier than qualifying for all other types of mortgages, making it easier for many people to be homeowners. The application process for a balloon loan, a conventional loan is much the same as for any other type of mortgage. You will still need to qualify as far as credit and income are concerned. Make sure you understand the options for refinancing at the end of the loan and make sure you verify with your lender that there is no possibility of losing that option. Consider the comparison below on choosing between Balloon Loan and Conventional loan;
The length of Loan:
This loan is more than an incredibly brief time frame when compared to the average twenty or thirty years on a conventional commercial mortgage. The typical term is among 30 and 90 days, even though you may have the ability to negotiate a longer period of as much as a year, in the event you deem it wise for the company finances.
The interest rates on a brief term loan are typically much larger than the interest that is indeed levied on a long-term commercial mortgage loan. It could be as much as double the quantity of interest, but is normally someplace in between 10 and 15%. It is for that reason that several lending institutions are willing to approve balloon mortgage loans. The rate of return on investment for a financier is significantly greater and contrary to well-liked opinion, the loans are relatively threat totally free.
Approval of Loans:
It takes a much shorter time frame to be approved than a conventional loan. This is simply because the evaluation method is somewhat truncated. Conventional commercial loans are typically calculated on the value of the property, plus the value of the location in which the property is located, too as the worth of the improvements on the property. Conventional loans appear at the future return on the investment, although a mortgage bridging loan is usually judged on the value of the property alone.
Percentage of Loan:
A balloon mortgage loan may not give the same quantity of financing that a conventional loan offers, merely because it truly is depending on the actual value of the property without having any improvements. It is a way of protecting the lender against a defaulted loan, so the worth of the loan is typically not even close towards the entire worth of the property.
One of the greatest advantages with this type of loan could be the comparatively minimal credit checks that are done on the applicant. Conventional loans often seek to obtain an individual guarantee for the loan while mortgage balloon loans are happy to accept the actual property as they only security.
A balloon mortgage does, however, have several disadvantages. The most obvious problem is the fact that you will have to pay a substantial lump sum at the end of the loan period. A balloon mortgage can also potentially cost you more money during its term, if interest rates increase to more than five percent above your existing balloon interest rate, you will have to go through the process of re-qualifying all over again. Apart from the potential extra cost, it can also be time-consuming to refinance the loan; however some balloon mortgages come with a built-in refinancing option.
Choosing the right lender is almost as important as choosing the right loan. You will want a lender who is reliable and helpful, remember, they will be part of your financial life for the next few years. It is especially important when it comes to a balloon mortgage, a somewhat specialized product that the lender is experienced in selling.
It is a good idea to try to get recommendations from friends, family or work colleagues who have already taken out a balloon mortgage. Regardless of which lender you choose, a balloon mortgage can be complicated and confusing. Just make sure that your lender explains everything and that there are no hidden charges or fees. They are required to give you an estimate of the closing costs.