A balloon mortgage has a lot in common with a fixed rate mortgage. The principles of calculating monthly payments are actually the same: monthly payment will be calculated as the amount required to repay the whole loan over a period of 30 years..
It is very unlikely that a borrower will have enough money to repay that huge amount of outstanding balance at once and at that exact moment, and that may cause serious problems, if the borrower will still be living in the house by the moment a balloon becomes due for payment.
The solution here is refinancing. Some people say that in this regard the balloon payment is in a way similar to an adjustable rate mortgage (ARM) - that is because you get a set period of paying a fixed rate and after that a period when the rate can be adjusted.
In case you are unsure about where you will be living in 7 years, it would be wise to abstain from the balloon mortgage option to avoid the risk of ending up with a huge balloon payment and costs of refinancing. |
