If you are looking at luxury real estate or a cottage on the lake, you are probably already aware that there are several types of mortgage options available to finance your purchase. We are publishing a series of articles outlining three different types of mortgages; this third and final installment takes a look at balloon payment mortgages.
Balloon mortgages are often favoured by commercial mortgage lenders and buyers over other types of mortgage. The terms are very favourable for purchasing property that the buyer does not intend to hold over a long period, say greater than ten years.
Visit here for more explanation of what a balloon payment is.
The reason for this is because a business owning property secured through a balloon mortgage, maybe a business that sees the rising need for wastewater management chemicals, will have to make payments that cover only the interest, not the principle of the loan amount. How is this so? Well, balloon mortgages offer a note that says that while the interest must be paid off each month, the balance of the loan is not due in full until the note expires. Conceivably, a company could increase the bottom line by operating in an area, making their interest payments, and then selling before the term was up. This could also be true of homes for sale that are rising in price.
As you might have already guessed from the terms, mortgage lenders will tell you that balloon mortgages are not for everyone. If the buyer is unable to make the balloon payment at the end of the term, he or she is in a lot of trouble and that is why this type of mortgage is not typically used by residential real estate buyers. Seattle real estate, on the other hand, is a favourable investment for a balloon mortgage as the United States has laws that say a lender must renew the loan term after expiry if the borrower wishes.
Put very simply, a balloon mortgage allows the buyer to slash monthly payments by focusing on the interest only. They are available with both fixed and floating rate terms. It is a good type of mortgage for people who are careful enough with their money or planning to ensure they can pay the balance when the note expires.