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Watch out for Balloon
Payments
The term "balloon payment" is such a fitting term
for this type of payoff method. Maybe people nowadays over-extend
themselves when buying and a home mortgage is no exception.
Imagine being able to take a significant portion
of your payment each month and defer it into a balloon. Then,
imagine as the years go on how filled that balloon will become.
The problem is that this imaginary balloon is not right there
in front of you to remind you that you need to deflate it
somehow.
So many people that go for these types of loans
simply do not understand them, believe they will inherit money
to pay it off (seriously!), or that they will make more money
later and pay it off. Of those three types, the only one that
makes sense is possibly making more money later; but it is
still a big risk.
The only time a balloon payment is recommended,
in our humble opinion, is when the buyer is in good financial
shape and has a savings plan in place and needs a lower payment
for a few years --usually for a solid investment of some kind.
This type of situation is very specific, however, so it would
be a rare case where I would suggest a balloon payment as
an option. As always, consult your financial advisor.
Adding to that scenario, it is possible that
a buyer is 99.99% certain they will sell the house before
the balloon payment becomes due. This is a potentially viable
solution, but there is still risk in that rising property
values are not set in stone --despite history or a convincing
lender. Also note that there will be much less acquired equity
in the home at the time of closing.
Be wary if a lender tries to lessen your concern by telling
you that it can be refinanced later on because there is no
guarantee that you will get favorable rates in the future,
have good credit in the future, or not have some other unforeseen
issues come up. This is risky no matter how you look at it.
You must keep in mind how big that balloon is getting and
how quickly it fills at all times. If you put it in the back
of your mind, that exploding sound might just be the balloon
payment wiping out your financial future!
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