Balloon mortgages, also known as bullet mortgages, are a type of mortgage loan that requires a borrower to make smaller payments over a set period, followed by a large payment at the end of the loan term.
While these types of loans can be attractive to some borrowers, they come with certain risks that must be considered.
In this article, we’re going to have a quick look at those risks and see why they make this type of loan a not-so-good option for certain borrowers. The best part? This advice has been shared by the best mortgage company in Dallas, TX, which means you can trust this with your eyes closed.
Risks of Balloon Mortgages
Payment Shock
One of the main risks of balloon mortgages is payment shock. This occurs when a borrower has been making small payments for several years, only to be faced with a large payment at the end of the loan term. The large payment can be a significant financial burden, and many borrowers may struggle to find the funds to pay it off.
Refinancing Risks
Another risk associated with balloon mortgages is refinancing. Refinancing a balloon mortgage can be difficult, as lenders may be hesitant to extend new loans to borrowers with large payments coming due soon. This can make it challenging for homebuyers to refinance their loans and may leave them with few options if they cannot make the balloon payment.
Negative Equity
Balloon mortgages also carry the risk of negative equity. Negative equity occurs when borrowers owe more on their mortgage than their home is worth. This can happen if home values decline or the borrower takes out a large loan and makes small payments for several years. Suppose a borrower has negative equity when their balloon payment comes due. In that case, they may be unable to sell their home or refinance their loan, leaving them in a difficult financial position.
Interest Rate Risk
Balloon mortgages also carry the risk of interest rates. This risk arises because balloon mortgages typically have fixed interest rates for the initial period, followed by a large payment at the end of the loan term. If interest rates rise during the loan term, borrowers may face higher monthly payments or a larger balloon payment at the end of the loan term. This can make it challenging for borrowers to budget for their mortgage payments, leading to financial difficulties.
While balloon mortgages come with risks, they can also benefit certain borrowers. One of the main advantages of a balloon mortgage is that it typically offers lower monthly payments during the initial period, allowing borrowers to free up more cash for other expenses.
Additionally, balloon mortgages may be a good option for borrowers who expect to have a large influx of cash in the future, such as a bonus or inheritance, that can be used to pay off the balloon payment. Overall, balloon mortgages can be useful for some borrowers, but it’s important to carefully evaluate the risks and benefits before deciding if it’s the right option.
As mentioned above, a PMI is designed to provide coverage to the lender when buyers put less than 20% of the home’s price as a downpayment.
So what exactly is its use when it can’t provide coverage to you during a home-buying process? Well, if you think the other way around, it allows you to buy a new home even if you cannot put more than 20% down as a downpayment. In other words, it simply paves the way for those potential buyers who’re not willing to spend a lot initially.
BPMI stands for Borrower-paid Mortgage Insurance. With this type of PMI, the premiums are part of your monthly payments (including interest payment, principal amount, and other taxes-related costs, etc.).
You may get the payments removed once you reach 22% equity in your home. BPMI can be a good option for those home buyers who are unsure how long they’d be able to keep their mortgage or stay in the same house.
LPMI, aka Lender-paid Mortgage Insurance, is another popular PMI type in which your lender pays your mortgage insurance for you. But don’t let the name fool you, as they don’t do it for free.