Balloon Mortgage: Features, Advantages & Disadvantages of borrowing
By the term balloon, you may perhaps get the hint of what we are going to discuss about. Nowadays, there are different types of mortgage loans. This is because it has become very much popular in recent times. By witnessing the demand of borrowers, a new type of mortgage loan has been introduced by the lenders.
It has been observed very commonly that although people like to borrow mortgage loans with a long tenure, they hardly wish to pay high instalments throughout the entire tenure. Rather, most borrowers often offered to lenders to allow them for lump sum repayment at the terminal period of the tenure. A balloon mortgage is something that fulfils the wish of those borrowers.
But it is always better to know everything before borrowing this loan. So, let us know every single factor about balloon mortgage.
What is Balloon Mortgage?
A special type of house loan which offers low monthly instalments and a high repayment at the terminal stage of the debt is known as a balloon mortgage. By applying for this loan, the borrowers must repay double the monthly instalments even if there is a facility to keep something as a pledge. Actually, unlike any other mortgage loan, it functions.
Throughout the entire tenure of loan repayment, you must remember that only a part of interest is subject to deduct. Besides, when the time comes for final settlement, the borrower will be able to repay the entire principal amount. Therefore, you can understand how much money you need to pay back to the lender at a time. Even at the last half of repayment, the borrower needs to repay both principal and last quarter of interest.
However, talking about the rate of interest, it is quite lower than other mortgage loans. Even the lender is quite reluctant to offer a very huge span of time due to low payment terms. Mostly a lender allows a borrower to repay for maximum 5 years.
Features of a balloon mortgage
Before you apply for a balloon mortgage, know well about it. Here we will discuss about some of the most important factors about this particular secured loan. These are,
- Short term
Unlike any other secured mortgage loan, this type of debt does not come with a long term borrowing facility. This is because the borrower would like to repay a very small amount of money in the form of instalments. Out of insecurity, the lender usually does not allow a borrower to have longer repayment tenure.
- Low-interest rate
Another important feature of a balloon mortgage is very low interest. Moreover, there is no question of consolidated rates or charges. The lender lends money at a fixed rate of interest. There is no question of flexible rates.
Moreover, even if you borrow a 3000 Pound Loan or a 30000-pound loan, it will hardly matter. The rate of interest will not vary depending upon the amount borrowed.
One of the commonest repayment methods, amortisation, is applied to this balloon mortgage loan. It is a method of repaying the outstanding amount by dividing it into two parts, interest and principle. Due to the application of amortisation, the borrower gets the ease of repayment by dividing interest and principle.
- Minimum repayment amount
Only because of amortisation, a borrower can easily minimise the repayment amount as per his wish. After paying the entire interest amount throughout the monthly instalment, one must pay in lump sum amount at the terminal stage. However, through the entire tenure, one can easily make repayment due to the minimum repayment amount.
Advantages & Disadvantages of borrowing balloon mortgage
There are some advantages as well as disadvantages of borrowing a balloon mortgage loan. It is better to know everything before borrowing this type of loan.
Due to low payment, there is no chance of default
In most cases, it has been observed that people fail to repay due to a huge amount of instalment. A borrower can easily keep the low paying amount throughout the repayment tenure, which helps him from being a defaulter. But in balloon mortgage, there is no scope of being a defaulter.
A borrower can also find peace of mind
Being secured loans, this type of mortgage debt does not run for a long time. As a result, the borrower can stay worriless. His belonging which is under the grasp of the lender, he can easily get it back.
Fixed-rate of interest
As the borrower needs not to repay in variable interest rate, even if he repays only the interest amount through small repayment, there is no scope of missing even a single one. Besides, the borrower can easily stick to the fixed-rate and save money while repaying the loan.
No scope to buy the property later
Even if you are repaying a small amount of money in the form of an instalment, there is still no scope for huge savings to purchase a property.
A risk of pre-closing debt
Sometimes a lender may ask for pre-closing the loan by paying the entire outstanding at a time. Now it becomes no longer possible for a borrower to foreclose the loan as he needs to pay a huge amount of money.
Apart from these two, there are many other disadvantages. Moreover, the chance of failure is even here as it becomes difficult for a borrower to repay most of the outstanding amount at once.
Ailsa Adam is the Editor-in-Chief and former content head at Hugeloanlender. She has been a valuable member of the content strategy team since 2017 due to her abundant experience in the finance sector. Passionate about helping individuals navigate the world of loans and personal finance, she has dedicated herself to acquiring extensive knowledge on various financial products. Before her role at Hugeloanlender,
Ailsa worked as a seasoned journalist and writer, specialising in creating informative blogs and articles on diverse loan types. She is known for her meticulous research and commitment to delivering accurate and engaging content. She holds a degree in MBA Finance and has a keen interest in creative writing and art.