Balloon Payment

Balloon Payment

A balloon payment is a larger-than-usual final payment due at the end of a mortgage term or amortization loan. Lenders use balloon payments to offer lower interest rates and reduced monthly payments throughout the duration of the loan by requiring a significant lump sum at the end.

Balloon loans can be advantageous for borrowers who may not have the means for a large down payment, enabling them to secure lower interest rates. However, entering into such a mortgage agreement requires careful consideration, as balloon payments may not be suitable for everyone. Savvy borrowers recognize that they will face a substantial payment at the end of the loan period. This type of mortgage might appeal to serious investors or individuals with strong savings habits, as it allows them to benefit from lower monthly payments.

Frequently, balloon payments are included in “two-step mortgages,” where the remaining balance transitions to a new mortgage with a different amortization schedule, interest rate, and terms for the remaining loan amount. If borrowers find themselves unable to make the large final payment, they often opt to refinance the loan or sell the property to manage their financial obligations.

Credit Requirements

The FHA sets credit requirements for government-backed home loans. For example, to use the 3.5% down payment option, you need a FICO score of at least 580.

Borrower

A mortgage borrower is a person who gets a loan to buy a home. By borrowing money, they promise to pay it back fully and on time, including interest.

Earnest Money

You pay the earnest money deposit after the seller accepts your offer. This deposit shows that you’re serious about buying the home and helps secure the deal.

Cash-Out Refinance

A cash-out refinance means you swap your current mortgage for a new one with a bigger loan. This lets you access the home equity you’ve built up over time.

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