Is A Balloon Payment Wise

Answer 1

When you take out a mortgage, you have a number of options. One of them is a balloon payment mortgage. This is a mortgage that starts out with small payments, and these increase near the end of the mortgage. You will probably even have one large payment that is due at the very end. If you have been paying $1,000 each month for your home, you will then need to pay $10,000 at the end. These numbers are not indicative of real mortgages since each one is different, but they demonstrate the basic idea.

Some people love the idea of these mortgages because they can pay such a low amount at the beginning. For a businessman, for example, this can be a good idea. His business may be very small, but he can still buy a nice first home for him and his wife. As his company grows, he can just put away money for that last payment. By the time that he gets to it, his company may be very large and he will be able to pay off his house with ease. This is a perfect way for him to have a very nice home the whole time.

The problem that this causes is that some people use these and then even the small payments are at the max level that their budget allows. They are trying to live above what they can really afford and they are hoping that they will be able to save up enough money over the duration of their mortgage to pay off the home.

When deciding if this is a wise idea, you need to think about how likely it is that you can come up with that last payment. Use a balloon payment calculator to find out what all of your payments, including that one, are going to look like. If you cannot come up with the money, you could lose your home even though you have been paying for it for years. There is a large degree of risk here. Only use this if you are sure that you will not lose in the end.