A balloon loan is a type of loan that does not fully amortize over its term. Since it is not fully amortized, a balloon payment is required at the end of the term to repay the remaining principal balance of the loan.
If you aren’t familiar with options for financing, it is never too late to start. Understanding the different terms and being able to relate them to each other will help you avoid bad financial situations. One of the terms that you should know is the balloon loan. This can either help you financially or cause you problems. Understanding the details of how balloons work and using them to your advantage will allow you to pop into the right loan.
Understanding balloon loan
Balloon loans are used as ways to lower monthly payments. It does this by consolidating a specific percentage of your loan each month. You will pay the remaining percentage at the end of your entire loan. Usually, this will equal about fifty percent of the loan you have.
The good
You can work with balloon loans to your advantage if you have the right finances in place. If you know that you will have a large amount of money at the end of your loan term, then having a balloon can help you save and build your credibility with financial investments later.
The bad
If you aren’t certain of your financial status and what it will be in ten years, then a balloon will most likely not help you. Because you will be expecting to pay a large amount in the end, it can lead to debt and won’t help you to make an investment in another house in the future. In relation to this, if you are making a specific amount now but know that you will be making more later, then you can use a balloon in order to stabilize your financial condition.
Using a balloon loan will put you into a situation where your mortgage will blow up to twice as much at the end of the term. This can be an advantage or a disadvantage, depending on your situation. By knowing exactly how to tie the end of the balloon, you will be able to find the best financial options for your situation.