Balloon home loans - Good or Bad?

Lending institutions have loans that are tailor-made to just about anyone's personal and financial situation. What suits one borrower, may not necessarily work for another, so it is unfair to conclude that any loan is either good or bad. The real question is whether a particular loan will suit your personal situation.

What Exactly Is A Balloon Home Loan?

A balloon home loan is a low fixed interest rate loan that has a very short term, usually around 10 years. After this period, the loan matures, and the borrower must pay the entire principal owing on the loan to the lending institution in one lump sum. Put simply, a balloon home loan is a very short-term home loan ending with a final lump sum payment, with some calculated risks involved.

Who Will Balloon Home Loans Benefit?

As mentioned, there are some calculated risks with a balloon home loan, and is a loan that will not suit a great number of borrowers. If you were to take out a loan for $200,000, and after 10 years you have paid out $100,000, you will need to find $100,000 in a lump sum, or refinance.

There are some people who can benefit from a loan such as this. If you are in the business of flipping homes, you had large a sum of money owing to you, or you don't intend to keep the home for more than the term of the loan, a balloon home loan is a great idea since the fixed interest rate is often well below ARM interest rates.

If you intend to keep your home for a long period of time, a balloon home loan is not a very good option. Apart from having a short-term fixed to it, you also run the risk of losing your home at the end of the loan if you are unable to get it refinanced, or if you don't have the lump sum to pay at the end of the term. Additionally, you run the risk of, at the end of the term, having to pay much higher interest rates than what are currently being offered if there is a hike in interest rates during this time.

To determine whether a balloon home loan is the best option, you will have to ask yourself what you want the home loan for, and how long you intend to keep the home. If you are considering using a balloon home loan for the short term, and then refinancing later on, make sure that you are aware of the risks involved. Accept that there is a small possibility of not being able to get finance, and losing your home.

There are no 'good or bad' loans, just different loans tailored to suit different borrowers, and their particular situations. A balloon home loan will suit most people looking for a short-term solution to their mortgage problems. For others looking for a more stable option, the balloon home mortgage is far too risky.

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