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5 Ways to Lose Your Home With a Balloon Mortgage

By Gretchen Wegrich Updated on 6/12/2017

ForeclosureA balloon mortgage is a useful financial tool that can create the opportunity for homeownership if used correctly. If used incorrectly, however, a balloon mortgage can be harmful and puts unnecessary financial strain on a borrower. 

Risk of foreclosure increases when certain factors are present. Avoid a balloon mortgage in any of the following five situations:

Bad Credit History

When a balloon payment is due after the initial term of the loan is over, you are required to either pay the full amount remaining or refinance your home loan. Not surprisingly, most homeowners choose to refinance. 

However, if you have poor credit, you may be unable to refinance, thus finding yourself facing a massive and unaffordable loan payment. Foreclosure is a common outcome at this point. If you have bad credit and are facing a balloon payment mortgage that you cannot afford, contact a mortgage lender to discuss your options today.

Low or Decreasing Property Value

A property with an especially low or decreasing property value may be difficult to finance. When the balloon payment comes dues and a refinance is necessary, you may be unable to secure a new loan. This is why a balloon mortgage is not the best choice for an extremely low-end property.

No Money Down

Don't use a balloon mortgage to finance a house without making a down payment. The down payment gains you a significant share of equity in the home and will make it easier to refinance when the initial term of the loan is due.

Interest-Only Terms

The homeowner doesn't build up equity ownership when making interest-only payments, as none of the principal balance of the loan is being paid for. Once again, this will make the upcoming refinance much more difficult. 

Also, monthly interest-only payments are typically lower than standard monthly mortgage payments, which may reflect poorly on the homeowner's financial flexibility.

Short Initial Loan Period

Balloon mortgages allow the borrower to put off the bulk of the home costs until a later date when he or she will be able to either pay in full or refinance on better terms. 

But if the initial amortized loan period of the balloon mortgage is too short, the borrower won't have time to correct the problems that forced them into a balloon mortgage in the first place. Issues such as poor credit, legal battles, and low personal savings take some time to address. 

Therefore, don't enter a balloon mortgage unless the initial loan period is long enough to allow for resolution of these issues.

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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