One of such options is the balloon loan. However, like every other financial loan, it comes with its own sets of risks and a proper assessment prior to applying for that loan is essential. For those purposes, we have introduced the balloon loan calculator. Yet, before you start using that tool, it is more important to learn everything about this option. In order to reap all the benefits of this short term option, you require proper understanding and planning. So, today, we will share information that will help you make a wise decision in this aspect.
As we have already established, a balloon loan is a short term loan with low interest rate. So, how is it different than any other short term loan? Well, here is the catch. Unlike a typical loan where you have the option of refinancing after the end of the term, a balloon loan requires you to pay off the remaining principal in one payment. That one huge final payment is termed as the balloon payment. If you are not able to pay the balance in full, you will have to reset the loan for current market rate. However, the reset option is usually not available for loans with less than five years amortization period.
One of the major benefits of a balloon loan is that your monthly payment till the end of the term is mostly the interest. Therefore, it is an extremely beneficial option for those who wish to sell their home before the term ends. And it is also a good option for those who may not have enough money to pay in full or take a high interest rate loan but are positive about being able to pay in full after five or seven years. It is also a good option to avoid paying higher monthly payment in times when interest rates are higher. You can refinance for lower as the rates come down later. Use the balloon loan calculator to analyze your odds.
Like any other financial option you choose, balloon loan also has its risks. The biggest one is the inability to pay the lump sum amount at the end of the term. In case the interest rates are higher, you will have to reset the loan as per that rate. Also, as we pointed out, the payments you are making are mostly the interest rather than the principal itself. Therefore, the equity is not building on your property.
These risks, however, do not imply that the option is not at all feasible for you. Compare the risks and benefits of a balloon loan by using the balloon loan calculator and find out whether it will suit your needs or not.