A balloon mortgage is a type of home equity loan in which payments remain low throughout the life of the loan, until a large balloon payment becomes due at the end of the loan term. Balloon loans typically only require repayment of the interest on the loan until the final payment is due. If you're interested in a balloon mortgage, make sure you have a good strategy for repaying it to avoid ending up in a serious financial bind when your loan matures.
Amortize Your Loan
Use an online mortgage calculator like the one on Bankrate to amortize your home equity mortgage yourself. Plug in your total loan amount, the interest rate you pay on the loan, and the time period you have to pay back the loan before the balloon payment is due. The mortgage calculator provides the payment amount which, if paid monthly, would satisfy the total loan principle and interest payments for the specified period, whether it is 10, 15 or 20 years. Make those payments yourself on a monthly basis, and you can gradually pay down the mortgage before the balloon payment is due.
Contact the Lender
Contact your lender to discuss the situation if you are uncomfortable with the idea of a balloon payment, or if you feel you will not have the means to make that final payment. Your mortgage lender might have some other options available to you, like refinancing the equity loan into a more traditional loan with fixed monthly payments. The bank might also be willing to extend the loan term and delay the date your balloon payments comes due, or the bank might help you figure out a more manageable amortization schedule that lets you pay down the home equity sooner.
Add Extra Cash
Resolve to add extra payments to your home equity loan whenever you can. This means pledging to pay down the mortgage with any money you receive from holiday bonuses at work, gifts of cash from friends and family, tax refunds or pay raises. Reducing the loan principle with extra payments also reduces the total interest the loan incurs, so you can pay down the balance even sooner.
Take a New Loan
Balloon mortgages can be daunting to any home owner, especially if you do not plan to sell your home before the balloon payment is due. If you intend to stay in the home and have not been able to pay down the mortgage sufficiently, apply for a new loan to help cover the final payment and reduce your stress level. You might be able to get a new equity loan, or you can apply for a personal loan in an amount that satisfies the balloon payment.
Sara Melone is a mother of three and a graduate of UNH. With prior careers in insurance and finance, photography, as well as certifications in fitness and nutrition, Melone draws directly from past experience and varying interests. She contributes with equal passion to birth journals, investment blogs, and self-help websites.