Can a balloon mortgage save me money?

A Balloon Mortgage Can Save You Thousands

By Mark Barnes

Direct Lending Solutions Staff Writer

In spite of its frightening name, a balloon mortgage doesn't burst. If you're unfamiliar with a home loan that has a balloon payment, it is really a very simple concept. Your mortgage payment is amortized over a 30-year period, in order to make the payment more palatable. The difference in the balloon mortgage and the fixed-rate mortgage, or FRM, is that when the balloon period arrives, the lender requires you to pay the entire balance of the loan.

How would I ever pay the balance of a home loan that is $200,000 or more, you might ask. Well, you won't. What you do is sell your home or refinance to a new mortgage. If you've read other articles here at Direct Lending Solutions, the pieces on adjustable rate mortgages and hybrid ARMs, for example, you already know that the key feature of these unique home loan programs is the monthly savings that they supply over the FRM.

When looking for maximum monthly savings, the hybrid ARM is the best program available. The difference in the interest rate between the ARMs and virtually any FRM is big enough to save up to hundreds of dollars monthly on most loan amounts. If you are concerned about the loan term for the adjustable rate mortgages, though, you may wish to consider a balloon mortgage, which does not adjust.

Assume, for instance, that you are financing $250,000, and you are certain that you will move in seven years or less. The key is your certainty. If your situation is likely to change, you'll want to consider a different home loan program - probably one of the adjustable rate mortgage programs. Another option is to ask the lender about a balloon that is convertible, meaning it has an option when the balloon payment comes due to convert to a FRM.

The difference in the interest rates on the 7-year balloon mortgage and the 30-year FRM is usually about 1.25%. Assuming this is the case, check out these numbers: The FRM payment for a 250k home loan, at 6.5% interest, is $1,580. This does not include taxes and insurance. The 7-year balloon, at 5.2% interest, yields a monthly principal and interest payment of $1,373 -- $207 less each month than the fixed rate mortgage.

Suppose you remain in your home for the full seven years, or 84 months. In the 85th month you will move, so you don't have to worry about paying the balance of the mortgage, when the balloon payment comes due. Your savings over the life of this loan is $17,388. Now, when you move into your new home, you've got a nice piece of change to use to fill it with some new furniture.

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Related Pages in Our Site: Apply for a New Home | Refinancing or Home Equity | Hybrid ARMS