Anytime that you apply for a loan, whether it's to purchase a home, buy a car or for any other purpose, you need to make sure that you are aware of the type loan that you are getting. There are different types of loans and depending on what you are looking for and what you can qualify for will depend on the type of not that you can get. One of these types is called a Balloon Loan or a Balloon Note.
A balloon loan is a long-term loan, most times used as a mortgage, which has one large payment due when the loan matures (comes to the end of its term). Usually a balloon note will have the benefit of very low interest only payments; given that most of the loan balance is not due until the end of the payment period.
There are many benefits to a balloon payment. One of the advantages of having a balloon payment is that there is a very small amount of capital outlaid during the life of the loan. Because of this a number of people that are expecting a large sum of cash from one source or another may decide that a balloon payment is perfect for their needs.
With a balloon note if you have to have a down payment, it is usually much less than what it would normally be. Also the interest rate in most cases is quiet a bit lower, saving you money on capital outlay. You may also be able to have a bit more flexibility to advance capital during the term of the loan.
Another benefit is that the monthly payments are lower than those of a standard loan. With the right kind of terms on your note, there are times when it is possible to lower a balloon payment, depending on the circumstances. Yet another benefit is once the rate is set the interest rate will not adjust.
One of the disadvantages of balloon payments is that the final payment due is rather large. So, if you are getting a balloon note as an in between note to tide you because you are expecting a guaranteed large sum of money in the future you should be ok. However if you are not sure if you will get it or do not know of any money coming your way, you need to take a bit more care before getting this type of note.
Another problem is when the note reaches maturity, if you are refinancing instead of paying off, the cost could be prohibitive.
It the interest rate were to increase while you have the balloon payment, you could end up paying extra costs in order to refinance. If the rates go up by more than 5% above the interest rate originally received on the balloon note, you will have to re-qualify for a loan and your home will have to be reappraised. This can end up costing your more money than what you reasonably saved with the balloon payment. Balloon payments are a bit riskier than normal notes because of the changes that can happen with the interest rates over a period of time. If your note comes due at the wrong time, you can really be up a creek so speak.
When considering a balloon note there some aspects that you need to keep in mind. What is the interest rate, when will the balance be due, what refinance options are available, can you change the payment to a regular payment or will you have to re-qualify for s standard mortgage when the note matures?
It is vital to have prepared and have this information so that you know what you will be able to do in order to get a fixed amount loan by the time that the final payment is due. Also, look into what will happen after the final payment is due so you do not get accustomed in an endless cycle of having to constantly refinance your home.
You can do a balloon note at any time, however the best way to do a balloon payment is if you know that you will have money at the end of the loan term, looking for lower rates or know that you will be in the home for a number of years. If this does not fit with your needs, or it you feel it is too risky, then the numerous other lending options may be better for you to consider.