Balloon Mortgage Calculator

Estimate your total cost including your buyout

A balloon mortgage is a unique short-term loan option for homebuyers. After finding the perfect home, the next step is to secure your financing. Part of the process is exploring your options. With a balloon mortgage, you get low monthly payments in exchange for a substantial payoff at the end of your term. By adding a few of your details to the calculator, you can see what your obligations will be. This loan comes with considerable risk, but can be beneficial for the right person.

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What is a balloon mortgage?
A balloon mortgage is unlike any loan on the market. It has a short duration, with monthly payments based on a typical 30-year term, but is due in full after 5 to 10 years. The final amount is always much higher than the monthly dues preceding it, thus the expression “balloon loan”. In a standard scenario, the last payment can be 70% or more of the original mortgage amount.
While the loan comes with inherent dangers, it can provide many benefits to consumers. Borrowers receive lower payments, better interest rates, and more flexibility. When considering a balloon mortgage, it is crucial to think about how you will pay your balance. If you can’t make the final payment, you could face some significant consequences.
How does a balloon mortgage work?
This type of mortgage can be attractive to homebuyers due to the initially low payments. The payments are calculated by dividing the loan over a longer term, usually 30 years. Due to preferential interest rates, the balloon mortgage costs less than a similar fixed or variable mortgage. The only catch is the large principal balance that is due after five, seven, or ten years.
The loan payments can be structured as fully amortizing (principal and interest combined) or interest only. The structure can have quite an impact on the final payment. An Interest-only mortgage might make your home more affordable, but won’t help you pay down the balance. Ultimately, you will owe more when the initial term ends.
Is a balloon mortgage right for me?
You may be wondering what type of homebuyer would want this kind of a loan. Under the right circumstances, a balloon mortgage can make a lot of sense. The following scenarios highlight when it could be a good choice:
A homeowner that plans to move and sell their home in a few years. Balloon mortgages offer friendly rates so a borrower can benefit from smaller payments until they move. The final payment often doesn’t come into play, as the sale proceeds can be used to cover the balance.
An applicant that intends to refinance before the end of the term. A balloon loan can be advantageous as a temporary solution. This applicant may have paid off or consolidated their debts recently to give their credit a boost. When you’re anticipating an improvement in your credit, a balloon mortgage can act as a bridge to your long-term solution.
Homebuyers on the brink of a pay raise.To make the final payment, most borrowers will need to refinance their balloon payment. When refinancing, the lender factors in the applicant’s finances, among other things. Getting a raise and building up your savings can make you a more qualified applicant, making a balloon mortgage less risky.
Associated risks
While a balloon mortgage can be an excellent option for some, there are still many risks to consider. Many borrowers intend to sell their property or refinance when the initial term runs out. However, there are many variables that can affect those plans.
The first consideration is that property values can decrease. You could find yourself in a situation where your loan matures, and your home is worth less than your remaining balance. You might not make enough from the sale for your final payment. Plus, no lender will refinance your mortgage if the home is worth less than it’s existing loan. The consequences can be foreclosure, bankruptcy, and/or damaged credit.
Even If your home maintains its value, there is no guarantee that you will qualify for refinancing. You could be making less income, and your credit score could be lower then it is now. Beyond that, new regulations could make it harder to qualify for a loan. There is no way of predicting if you will get approved for a loan, or what the rate will be when the time comes.
Any combination of these things could make it difficult and expensive to refinance, if not impossible. Conventional loans can provide security and protection if you just don’t want to take the chance. However, the best alternative to the balloon mortgage is an adjustable rate mortgage (ARM).
Balloon mortgage compared to other mortgages
There is an abundance of mortgage options available to consumers. A balloon mortgage can be compared to various fixed and adjustable loans to illustrate its risk and value.
For the comparison, let’s assume a family needs to borrow $300,000 to purchase a home. The homebuyers are qualified applicants, putting down 20% with few outstanding debts. Their son is starting university soon, so the couple plans to move into a smaller home in the next seven years. Here’s what they can expect:
Loan type Interest rate Monthly payment Total of monthly payments Total interest paid Balance at end of term Total cost
10 year balloon 3.875% $1,410.71 $169,285.20 $104,633 $236,759.29 $406,044.49
7/1 ARM 4.000% $1,432.25 $120,309 (after seven years) $78,487.05 (after seven years) $258,178.04 (after seven years) Tentative on the index and margin.
15 year fixed 3.625% $2,163.11 $389,359.8 $89,359.81 $0 $389,359.81
30 year fixed 4.125% $1,453.95 $523,421.31 $223,421.31 $0 $523,421.31
Ultimately, each loan has different advantages. A 15-year fixed rate mortgage has the highest monthly payments but works out to the least total charges. The 10-year balloon mortgage seems the most affordable but can be a gamble if certain factors come into play when the term runs out.
A 7/1 ARM has slightly higher payments and provides more security as a trade-off. With rate caps, you can limit the amount your payments will change. Plus, there’s no remaining balance unless you choose to refinance after the introductory period. Finally, the 30-year fixed rate mortgage provides the most security and thus, costs that top the list.
With this information, it can be difficult to justify a balloon mortgage unless you know for a fact that you’ll be selling the house soon. A balloon mortgage would be a better deal if interest rates stayed low and home values continued to appreciate. Since there are a lot of unpredictable variables, you need to consider your goals before choosing this type of mortgage. If you expect significant increases to your income and credit score, and want the lowest payment right now – a balloon mortgage might be suitable for you.
How to get a balloon mortgage
Balloon mortgages are less common now, than they were in the past. In recent years, new regulations made it difficult for lenders to administrate these high-risk loans. After the 2008 mortgage crisis in the US, homes decreased in evaluation and many homeowners were unable to pay their debts. As a result, many consumers were forced to foreclose. If you do a web search for current balloon mortgage rates, you won’t find much information.
In most cases, creditors will include a balloon payment clause on a conventional fixed rate mortgage to lower the monthly payments. In other instances, hard money lenders might actually administer a true balloon mortgage. Interested consumers will have to inquire with multiple lending institutions to find this financial product.
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