An interest only mortgage is as the name implies a mortgage loan where the borrower makes interest only payments. There are short term reasons for using interest only mortgage loans.
Real estate investors that need short term financing while flipping a property can use interest only mortgages to get the lowest monthly payment while finding a buyer for their property. Homeowners with short-term financing needs can also benefit from interest only mortgages.
The trouble with interest only mortgage loans comes from the fact that it is very easy to qualify for more mortgage than you could afford with a traditional mortgage. Many homeowners get into trouble by purchasing homes they cannot afford and floating the financing with an interest only mortgage.
This is fine while interest rates are low; however, when rates go up or the lender requires payment on the principal loan balance, many homeowners can quickly find their monthly budgets stretched to the limit.
In utilizing the balloon note option, a borrower makes amortized principal and interest payments on the note, as if it were a 30 year note; the catch: if it's a 5 year balloon, the entire balance of the unpaid principal is due at the end of five years, if it's a 10 year balloon, then the entire unpaid balance is due at the end of 10 years. The unsavory aspect of these types of notes has always been the huge payment that was due at the end of a specified amount of time.
If the buyer isn't able to find financing at the end of the 5 or 10 year term, or if the property has dropped in value, it's a great way to be bankrupt, or have the property foreclosed on. If you intend to sell your home within a 5 year period, the balloon note option is an excellent alternative that offers a lower monthly payment.
But, suppose you don't sell the home? Well you either must come up with the balance of the note, or find an alternative mortgage product. The biggest problem here occurs as you try to deal with the variables in the situation, when the balloon note matures.
When the note matures, if the interest rates are high, or if the real estate market is experiencing a slump, you may be forced to accept a higher interest rate, or produce a very big down payment with a new note. Either solution means that the conditions aren't favorable for the homeowner. But is this so very different from the interest only mortgages?
The interest only mortgages are interest only for a specific term of time; then the principal and interest become due on the note, at a much higher monthly rate. The only difference here is that the lending institution is locked into a 20 or 30 year note. But the borrower is no better, off, if he or she cannot afford the payments at the higher level, there still exists a greater potential for bankruptcy or foreclosure.
There are other, more stable loan products available, but these products don't provide the kind of flexibility for the mortgage lender or the borrower, that the interest only mortgages and balloon notes do.
They also don't pose the risk these two loans. The interest rates, however, are very competitive on the interest only and balloon, and I don't' look for the general public to decide in favor of safety over savings. After all, nothing ventured, nothing gained.
Now, you see the old balloon note looks a little sharper than he did before the interest only mortgage moved in. At least with the balloon note a part of the monies paid each month are applied to the principal balance.
With the interest only mortgage, all of the payment monies are applied to the interest, so at the end of the interest only term, you still owe as much principal as you did in the beginning. It would seem to me, it's six of one, half a dozen of the other. The borrower really isn't making any progress, either way.
A balloon payment is simply a large sum of loan principal due at a certain time. The balloon payment can represent a portion or the entire balance of the loan principal. Balloon mortgages frequently come in the form of interest only loans. These mortgages are attractive because of they are easy to loans to qualify for and have very low monthly payments.
The problem with an interest only mortgage of this type is that the balloon payment is due at the end of the mortgage term. Loans of this type are typically only for seven to ten years.
At the end of this time, the principal balance is due; if you don't have the cash, you will be forced to refinance the loan. Refinancing will cost you lender fees; however, if you are unable to qualify for a new mortgage you could lose your home to foreclosure.
Related Articles:
|
