While not for the average mortgage customer, a balloon mortgage loan in the Greater Boston Area does have its set of unique advantages. However, a thorough understanding of the loan and its inherent characteristics is a must before signing any loan contracts; because of the risks associated with this loan.
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What is a Balloon Mortgage Loan?
In this special type of mortgage loan, the entire balance is not amortized over the life of the loan i.e. you will be only paying the interest rate along with a small percent of the original amount borrowed from the lender in your monthly payments. After a number of years of such low monthly payments, when the loan period ends, you will be expected to repay the entire amount that is due. This is why such loans are also known as partially amortized mortgage loans.
Why is it called as a Balloon Mortgage Loan?
When a small amount of air is regularly pumped into a balloon, the size will slowly but surely increase. In a similar manner, since the amount actually being amortized is very low, slowly but surely the amount you will have to repay back will also increase. In the end when the time to repay the loan comes, you will be left with one huge payment. Because of the regular increase in the amount owed, the result will be an enlarged balloon-like payment. Hence the name.
Terminology Commonly Used In Balloon Mortgage Loans
To compare different Balloon mortgage loans, you must first understand the format used by different lenders. Balloon mortgage loans in the Greater Boston Area are commonly expressed in two formats:
- X Due in Y Format: The most commonly used format to express balloon loans, the X stands for the period of amortization and the Y stands for the actual term period of the loan. So if a loan is expressed as a 30 Due in 15, it means that the amortization amount you will pay every month will be based on a 30-year period. But you will have to repay the entire loan amount within 15 years i.e. the balloon payment of the remaining amount will have to be made at the end of 15 years.
- X/Y Format: In this second format, the X stands for the entire term of the mortgage loan, while the Y stands for the difference between the loan period and the amortization period (The sum of X and Y will give you the amortization period of the loan). Taking an example, an 11/19 loan means that the amortization amount to be paid every month will be based on 30 years (X+Y = 11+19=30), but the balloon payment will have to be made after 11 years (X).
While balloon mortgage loans do have a number of positives, they also have their fair share of disadvantages. So before taking the leap, make sure that you understand what you are getting yourself into. Consult and review the risks vs. potential rewards with a loan officer.