Balloon Payment Mortgage in real estate loans (Balloon Payment Mortgage)

Balloon loans require the lender to pay off the loan balance in full within a certain short period of time (usually 3, 5 or 7 years). The interest rate on this type of loan can be fixed or variable.
Another name for a large final payment loan, also known as a “balloon loan,” is a special type of loan that is generally limited to a short term (e.g., 3 to 7 years), but where the amount of each payment is calculated based on a long-term loan (e.g., 15 to 30 years).
This calculation, on the one hand, reduces the amount of each payment, but on the other hand, it accumulates a large amount, called the large final payment amount, at the end of the loan term. The interest rate on a large final payment loan is generally fixed for the duration of the large final payment loan.
This type of loan is like a balloon in that it starts out small but ends with a larger final payment. This final payment will require the borrower to pay it off when it is due.
The Emergence of Balloon Loans
In the U.S. real estate financial system, the amount of your monthly payment is reflected by your income ratio.
Usually your monthly payment and repayment pressure should not exceed 50% of your income, which varies from bank to bank. If you have a credit card, then the minimum payment on your credit card is calculated. If you have a car loan, then the monthly payment is calculated according to your car loan.
Of course, there are also property taxes, which are also calculated into the monthly payment.
If you have a long term loan, say 15 years, your monthly payment rate may be higher and the bank will not lend you the money.
The solution is to increase the down payment and reduce the loan amount or extend the loan term.
If extending the loan term does not solve the loan-to-value problem, then you need to consider using a different approach.
Balloon loans are not suitable for all borrowers, but those who have the following financial situation or willingness to borrow can consider the “balloon loan.
. Those who are considering a short to medium term loan, usually for 3-5 years.
. Those who have a low monthly income at the beginning of the loan period and cannot afford the high monthly payments of a regular short-term loan, but expect to have a large amount of money coming in at the end of the loan period to cover the larger lump sum of the remaining principal amount due at the end of the Balloon Loan.
. There are better investment channels and the investment yield is higher than the bank loan interest rate, and after a period of time, it is expected to receive the principal and income to pay off the remaining loan principal in one lump sum.
. Investors who are willing to take risks, such borrowers only repay a smaller monthly payment in the early stage of the loan and repay the remaining principal in one lump sum at the end of the loan period
It is important to note that borrowers who want a short-term loan and can afford to make high monthly payments are not suitable for balloon loans because, as you can see above, the total interest paid on a balloon loan for the same loan term is higher compared to a regular loan.
For families, if the final payment at the end of the loan is manageable within the family, but they are not willing to make high monthly payments, balloon loans can be considered.