When you think of a balloon, what comes to mind is a
large rubber pouch filled with air. Also, what comes to
mind is the frightening sound of one of these pouches
exploding under pressure. While a balloon can be an innocent
toy, a balloon payment -on the other hand- is significantly
Balloon payments are portions of a home equity loan that
are not financed. By financed, we mean scheduled to be
paid off gradually over a period of time. When being introduced
to a balloon payment, many people are pleased by the promises
of less fees, lower interest rates, and the amount of
time they have before the payment is due.
You should be aware of the fact that a balloon payment
is due in full at the end or some point during your loan's
term. This amount will vary depending on the type of loan
you have, and how much of the total loan amount was financed.
No matter which loan type you choose, know that balloon
payments are risky business.
If you do not have the money now, there is no guarantee
you will have it 10 years later. Balloon payments can
be significantly large, and many factors can affect your
ability to come up with such a large figure. A lender
will tell you that once you are near the end of the term,
you can always refinance the balloon payment.
The idea of refinancing sounds fine but what if your
credit rating is damaged due to some un-foreseen issue
like skyrocketing interest rates. In addition to this,
you are paying interest on the complete amount of your
home equity loan, including the balloon payment, thoughout
the entire home equity loan term.
Unless you have a way to guarantee payment in the future,
(i.e. the sale of you home or a plan to pay the amount
in full using an income tax refund) the balloon payment
should not be an option. Talk to your lender about other
possible solutions. If you can not afford the loan without
the balloon payment, you might have to accept that you
can not afford it.
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