How Does a Balloon Mortgage Work?

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Many people own homes through a mortgage agreement. Traditional mortgages are primarily fully amortized or gradually paid off with regular payments over the lifetime of the loan. Each payment contributes to both the principal and the interest.

A balloon mortgage is a short-term home loan with fixed-rate monthly payments that only take care of accrued interest on the loan for a set period. It also has a large “balloon” payment to cover the rest of the principal.

The payment plan is based mainly on a fifteen- or thirty-year mortgage, with small monthly payments until the due date for the balloon payment. These low regular payments partly cover the loan but require paying the remainder of the unpaid principal as a lump sum. Selling the house or refinancing the balloon loan before the payment is due is how most buyers approach this situation.

Key Issues with Balloon Mortgages

Lenders present a deadline by which the balloon payment is due (three- to seven-year period). The enormous amount is often more than borrowers can easily handle at once.

Paying only interest on a loan does not allow equity to build. Many homeowners use equity as a means to complete home improvements or other projects. Building equity also helps homeowners when it comes time to sell their home because a traditional mortgage reduces over time. 

Why People Opt for Balloon Loans

It is possible to refinance a balloon mortgage or sell the property before the balloon payment is due but it can be difficult to do so. A dry housing market, job loss, or low credit score are potential obstacles. Lay-offs and depressed home values can trap buyers in their balloon loans. Without the option to sell, refinance, or fulfill their balloon payments, borrowers may end up in foreclosure.

The One True Strategy

Traditional loans are generally safer than balloon mortgages. To keep housing costs at a minimum, use a balloon mortgage if you are sure you can exit before the balloon payment comes due. Otherwise, it is best to remain in the realm of traditional loans.

Review the pros and cons of taking a balloon loan before committing to it. Speak to your financial planner or realtor for professional guidance.

3 Tips for Finding a Mortgage Lender

Finding a mortgage lender should be easy, particularly for homebuyers who want to purchase a high-quality residence without having to worry about spending too much. However, many mortgage lenders are available nationwide, and the sheer volume of lenders can make it difficult to choose the right one.

Lucky for you, we’re here to help you streamline the process of selecting the ideal lender.

Now, let’s take a look at three tips that homebuyers can use to accelerate the process of choosing the perfect lender.

1. Know Your Credit Score

Your mortgage interest rate may vary based on your credit score. As such, you should learn your credit score before you begin your search for the right lender. This will enable you to boost your credit score if necessary – something that may help you get a preferred mortgage interest rate.

You are eligible for one free copy of your credit report annually from each of the three major credit reporting agencies (Equifax, Experian and TransUnion). Request a copy of your credit report, and you can find out your credit score and map out your search for the ideal mortgage lender accordingly.

2. Meet with Several Mortgage Lenders

There is no shortage of mortgage lenders in cities and towns around the country. Therefore, you should allocate the necessary time and resources to meet with several credit unions and banks to explore all of your mortgage options.

Each lender can provide details about fixed- and adjustable-rate mortgages, how these mortgages work and other pertinent mortgage information. This information can help you make an informed decision about a mortgage.

In addition, don’t hesitate to ask questions when you meet with a mortgage lender. If you obtain plenty of information from a mortgage lender, you’ll be able to understand the pros and cons of various mortgage options and make the best choice possible.

3. Review a Mortgage Closely

A mortgage may enable you to secure your dream residence, but it is important to understand all of the terms and conditions associated with a mortgage before you select a lender.

For example, if you decide to purchase a condo, your mortgage might only cover the costs of your property. Meanwhile, you still may be responsible for condo homeowners’ association fees that total hundreds of dollars each month, so you’ll need to budget properly.

Of course, you should feel comfortable working with a mortgage lender as well. The ideal mortgage lender should be available to answer your concerns and questions at any time and help you stay on track with your monthly mortgage payments.

If you need extra assistance as you consider the mortgage lenders in your area, you can reach out to a real estate agent for additional support. This housing market professional can provide insights into mortgage interest rates and may even be able to connect you with the top local lenders.

Take the guesswork out of finding the right mortgage lender – use these tips, and you can move one step closer to getting the financing you need to buy your dream residence.

How to Pay Off Your Mortgage Early

Most homeowners would love to be able to pay off their mortgage early. However, few see it as a possibility when they take into account their earnings and other bills.

 There are, however, a few ways to pay down your mortgage earlier than planned. But first, let’s talk about when it makes sense to try and pay off your mortgage.

 When to consider paying off your mortgage early

If you recently got a promotion, have someone move in with you who contributes to paying the bills, or recently got a secondary form of income, you might want to consider making extra payments on your mortgage.

However, having extra money doesn’t always mean you should spend it immediately on your home loan.

First, consider if you have a large enough emergency savings fund. It might be tempting to try and throw any extra money at your mortgage as soon as possible, but there are other financial commitments you should plan for as well.

If you have kids who will be applying to college soon, remember that student aid takes into account their parents’ finances. If your children plan on applying to institutions with high tuition, then your equity will be counted against you.

Refinancing to pay your mortgage early

Refinancing your home loan is one option if you’re considering increasing the payments on your mortgage. If you can refinance a 30-year loan to a 15-year loan with a lower interest rate, you’ll save money in two ways–your lower interest rate and the fact that you’ll be accruing interest for less time.

There is a downside to refinancing. Once you refinance, you’re locked into your new payment amount. So, if your higher income isn’t dependable, it might not make sense to commit to a higher monthly payment that you aren’t sure you’re going to be able to keep paying.

There’s also the matter of refinancing costs. Just like the costs associated with signing on your mortgage, you’ll have to pay closing costs on refinancing. You’ll need to weigh the cost of refinancing against the amount you’ll save on interest over the term of your mortgage to see if it truly makes sense to go through the refinancing process.

Paying more on your current loan

Even if you aren’t sure that refinancing is the best option, there are other ways you can make payments on your mortgage to pay it off years sooner than your term length.

One of the common methods is to simply make thirteen payments each year instead of twelve. To do this, homeowners often use their tax returns or savings to make the thirteenth payment. Over a thirty year mortgage, this could save you over full two years of added interest.

A second option is to make two bi-weekly payments rather than one monthly payment. By making biweekly payments you have the ability to make 26 payments in a year. If you were to just make two payments per month then you would make 24 total payments. Over time, those two extra payments per year add up.

How a USDA Loan Can Help You Buy a Home

The U.S. Department of Agriculture (USDA) offers multiple housing assistance programs for people hoping to achieve home ownership.

In spite of being offered by the USDA, you don’t need to be a farmer or rancher of any kind to qualify for a home loan. Similarly, you don’t have to buy a home miles from civilization–many popular, thickly-settled suburbs across the country also qualify for USDA programs.

In this article, we’re going to explain the different programs offered by the USDA, how to check your eligibility, how to find out which locations qualify, and how to get started with a loan.

USDA Assistance Programs

The USDA offers two types of home loans for prospective buyers. The direct program, or Section 502 Direct Loan Program, is designed to help low-income persons to acquire safe, affordable housing. The assistance for this loan comes in the form of a subsidy that can be applied directly to the applicant’s mortgage, reducing monthly mortgage payments for a certain period of time.

Another type of home loan offered by the USDA is the Single Family Home Guarantee. Much like an FHA or first-time homeowner’s loan, this type of mortgage is insured by the government. As a result, buyers can often qualify for lower interest rates and smaller down payments from their lenders.

Guarantees may be applied towards the purchase, rebuilding, or building of a rural home as an incentive to developing rural areas. Later, we’ll talk about what is considered “rural.”

Outside of help with buying homes, the USDA also provides grants and loans for repairing and modernizing rural homes.

Who is eligible for USDA mortgage assistance?

In general, those applying for USDA assistance must meet certain criteria. Applicants must meet income eligibility, be a U.S. citizen or qualified noncitizen, and must purchase a qualifying property.

For the Direct loan program, applicants must be without safe or sanitary housing and be unable to secure housing through other means. Whereas for USDA guaranteed loans, applicants need only fall under the maximum income limit.

To find out if you’re eligible immediately, fill out an eligibility form from the USDA.

How do I know which houses qualify?

Generally speaking, homes located within large, metropolitan cities won’t qualify for USDA loans. However, suburbs just outside of some larger cities often do. For example, towns located just a half hour’s drive outside of Boston have a good chance of being eligible.

To view the map of property eligibility, simply fill out the online eligibility form.

How Do I Get Started?

If you’re seeking a direct loan, you’ll have to contact your local Rural Development office. Applications for a direct loan are accepted year-round and are awarded based on funding availability.

For people looking for a private loan guaranteed by the USDA, applicants should contact an approved lender in the area. The lender will then work with the USDA loan specialist in your state.