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The Balloon Mortgage Benefits And Advantages


Do you know what balloon mortgage is? Read here to know more.

Balloon Mortgage

Source: Freepik

Today, the mortgage market offers various mortgage plans for buyers and lenders to help in certain situations. One such type of mortgage plan is the balloon mortgage.

A balloon mortgage is a mortgage plan where a borrower pays the mortgage in full on the maturity date. A borrower pays the interest and some part of the principal during the mortgage term. The borrower makes the payments in a lump sum on maturity, as the borrower only pays the interest during the installment payments.

Also, in some exceptional cases, the borrower pays the entire principal amount only at the time of maturity of the loan. As the payments made are a sizeable amount, they are called the balloon system.

How does it work?

The balloon mortgage system is brief time-based, and it targets to complete within five or ten years. The lender calculates the payments due for fifteen or twenty years and not for a brief period. By practicing this way, the monthly mortgage payments gradually reduce as the maturity date approaches.

The balloon payment is the principal amount that the borrower needs to pay, along with the accrued interest due. If a borrower does not make the balloon payment on time, the lender can issue a notice. It may trigger legal proceedings as well.

When to consider a balloon mortgage?

We have listed a few situations where a borrower can consider a balloon mortgage.

  • When paying installments is a hindrance, the borrower can adopt balloon payments.
  • When lump-sum payments are not an issue for a borrower.

Pros and cons of the balloon mortgage system

Every financial system has its own set of pros and cons. A balloon mortgage is no exception.

Pros and cons of Balloon Mortgage
Source: Freepik

Pros of the balloon mortgage

1. Low-interest rates

The primary advantage of a balloon mortgage system is the lower interest rates that they offer. Compared to other mortgages plans, a balloon mortgage helps a borrower get a lower interest rate.

2. Shorter loan term durations

Next, the balloon mortgage system has a shorter loan span when compared to a traditional mortgage. The maturity date arrives in five or ten years.

Cons of the balloon mortgage

1. A large amount to pay

The balloon mortgage system requires a borrower to pay an enormous amount at the maturity date. It may not be workable for many. Many borrowers may not be comfortable paying such a vast amount altogether.

2. Risk factor

Some borrowers cannot pay the lump sum amount at the maturity date and become defaulters. It puts a significant risk on the lender as they are at the risk of not recovering the principal amount.

To sum up, a balloon mortgage has its own set of advantages and disadvantages. A lender or borrower may adapt to it knowing its characteristics.

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