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What is a Balloon Payment?
If you are buying a home via contract for deed, you will more likely than not have to pay a balloon payment. Since contracts for deed are not fully amortized Kansas City home loans, you do not pay off the principal when you make your monthly payments. Rather, it is paid off when you make your larger, final payment at the end.
Is There a Difference Between a Balloon Payment & a Balloon Loan?
The short answer: no. A balloon payment is a larger-than-usual payment at the end of a paying term, and a balloon loan is a loan that has a larger-than-usual one-time payment at the end of the term. Despite the semantics, the two are one and the same.
What are the Benefits of a Balloon Payment?
As with all loans, the benefits depend on your unique situation. What may work for someone else may not work for you, so please talk to your loan officer to find a loan that works for you.
Balloon payments tend to have the advantage of having lower interest rates and monthly payments. They are also useful for borrowers who don’t have a lot of cash, but know they will be coming into a lot of money soon or plan to sell the home before the loan is over.
However, in order for balloon payments to work, the value of the property must stay the same or increase. Otherwise, it will be difficult to refinance and you can be left with a loan with unfavorable terms.
What are the Risks of a Balloon Payment?
If you do not know how you will pay off the loan when it comes due, consider another loan. You may have to get a traditional mortgage to help pay off the sum when it comes due. If you cannot pay off the amount, the sale can be cancelled by the seller and you cannot get a refund for the money you already paid.
Another drawback of a balloon payment is that they are not allowed in qualified mortgages. Balloon payments are not recommended for long-term borrowers as they are a short term solution.