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“This video. We re going to discuss balloon mortgages. So a balloon mortgage is a a mortgage in which the monthly payments are not going to be enough to amortize to pay off the loan. So let s say.
It s a seven year balloon mortgage by the end of seven years. The loan will not be paid off so. What you have is you have one final payment one final payment. That s really really large much larger than the previous payments.
And that s called the balloon payment and that is to finally like amortize and pay off the loan. Although typically you re going to actually refinance the balloon so it s a little bit easier. If i just get into an example and i ll show you what we re talking about here. So let s say that we had a seven year balloon mortgage.
And let s say that it was for an amount of one hundred and forty thousand dollars and the interest rate. You re being charged is four point five percent interest. So when you go to calculate for a balloon mortgage even though it s a seven year balloon. We re gonna calculate the monthly payment as if it was a 30 year fixed rate mortgage and i ll explain what we ll get into why in a moment.
But just so we re gonna have a monthly payment of seven hundred and nine dollars now again that says if we had a 30 year fixed rate mortgage for a hundred and forty thousand dollars. At four point five percent interest. So. If we were to draw out a little timeline let me let me draw a timeline here.
So if if we were to go a full 30 years. So this this is the years so here s your zero..
Where we take out the loan and so we ll say this is year seven so after thirty years at this point assuming we were making these payments of seven hundred nine dollars a month. We would amortize we have fully amortized alone. We would have the loan paid off at this point. But after seven years.
The loan becomes due so that so but so that year zero we re gonna owe a hundred and forty thousand right this is this is when we take out the loan now if we were to go. And say well. What is the balance due as of the end of year seven. It s gonna be a hundred and twenty one thousand eight hundred and thirty seven dollars.
So at this point in time after seven years it s a balloon payment. It comes due and the balloon payment is gonna be for a hundred and twenty one thousand and eight hundred and thirty seven dollars basically this is the balance due on the mortgage at the end of year seven. So that entire balance becomes due and you might say hey wait a minute. How could somebody possibly just all of a sudden have a hundred and twenty one thousand dollars.
This is just ridiculous. Why would and this kind of loan appeal to anybody well so let s think about about what happens here at this point at the end of year seven. So typically you re gonna have it written into your agreement with the lender. That you can refinance at that point that s what most people do now of course you do have the option to pay off the balance.
So you could pay off pay off balance by making that balloon payment. Assuming you have the money maybe you won the lottery or something. But most people are going to refinance. So essentially what this balloon mortgage is doing is it s saying that okay.
We re you re gonna be making these payments as if it were a thirty year mortgage. But at the end of seven years..
We re gonna say okay that s the end of the loan and you have to refinance assuming. You can t pay the balance. So this gives the lender. A little more security.
Because now if interest rates have gone up right. So. If there s been an increase in interest rates. Now the lender.
When you refinance the lender can charge you that that higher interest. Rate so we started with an interest rate of 45. So what if the interest rate at year seven let s say. It s not let s say they had skyrocketed let s say now it s at 12.
So now the lender can say yeah. I will let you refinance. No problem. That s written into the contract.
Now you got to pay 12 interest. So you might be thinking. Then okay. Well why why would a borrower.
Why would i if i m buying my home. Why would i ever agree to this bloomers isn t there a lot of risk here well..
There is right. There s you re exposed to changes in interest rates. Now of course. If interest rates go down.
It could actually benefit you. But you re getting a lower interest rate. Upfront. So you re getting a benefit from this up front.
And you might be thinking well. What about an adjustable rate mortgage. How does an arm loan different. Than what s happening here well an arm loan.
So we have this this four point five in percent interest rate that we start with well maybe with an arm loan. It might have a cap an arm loan might have a cap where it says okay at the end of five years. The interest rate. Even if it s at 12.
You can only increase by three percent of what the original value was so it can just go up four point five plus three. So we go to seven point five. So you d have this cap kind of protecting you with it with an arm loan. So actually a balloon mortgage.
Is is in that sense could be more riskier than an adjustable rate mortgage. Because you don t have that cap and so there s there s no cap and let me just emphasize here..
We are not going to so in this it works similar to an adjustable rate mortgage and that your rate is going to change. But you don t have that cap protection in exchange. Though you re getting that lower interest rate. Upfront than you would with an arm loan.
So something to think about is that if you plan to sell if you plan to sell your home if you re gonna sell in this period. Here if you say okay well before the balloon even comes due. I m gonna sell the home then okay maybe it s worth saying you know what i really get the cheapest interest rate by doing the blue mortgage and i m gonna sell before the balloon comes due so. Then i don t have to worry about refinancing and possibly incurring.
A much higher interest rate. Then a balloon mortgage might be a more attractable. A more attractive option than an arm loan or even a fixed rate mortgage. Because then you re just getting the intro trade savings.
But if you re not gonna sell in this period. Just understand that if you do a balloon mortgage. When the balloon comes due at the end of year seven or whatever the period is for the bloom mortgage. When that balloon payment comes due.
If interest rates have skyrocketed you could end up with a much ” ..
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