Did You Ever Heard About Balloon Payments ?
Everyone is not always aware of all the financial terms. Here is one more term about which you must know. That is, Balloon Payment. All of us love balloons and we can think of only one reason about their floating that they are filled with a gas lighter than air. However, with growing age we learn to understand the real concept about this working of balloons. There are hot air balloons and balloon payments which are known as dangerous balloons.
What is a Balloon Payment ?
An installment loan is structured to bring the financial ease to the borrower so that the borrower pays off part of the principal amount and interest in regular, consistent amounts fixed over time. That is the borrower will be able to pay off the entire loan debt in a known time frame without any burden of big amounts and any penalty. Balloon loans are somehow different from these loans. Instead of fixed monthly payments that gradually decreases debt amount and establish credit rating, balloon loans are paid off with large single payment when a loan reaches maturity. They are given the name “balloon payments” because the last payment is excessive as compared to the previous payments the borrower has been making so far. They are mostly observed in case of mortgages, business financing, commercial loans, and any other type of auto installment loan options.
What Risk is Involved in a Balloon Payment ?
It is very important for you to know as a borrower that if you will be facing a balloon payment at the end of your loan payments so you must have enough money to pay for inflated amount. However, even if you managed to save this money for the payment, you might still end up in trouble. The reason behind is the value of the asset, for which you had borrowed the loan, may go down. So, if the borrower tries to compensate by selling or refinancing the asset (like property or vehicle) he will have to the face the loss. While mortgages with balloon payments may have better initial rates, the borrower must never underestimate the risks involved.
Alternatives to Balloon Payments :
1. Selling Your Home: If you do not have the find to cover the balloon payment, then you may consider selling whatever property was loaned (i.e. a home, car). This is a good alternative to avoid the foreclosure or filing for bankruptcy. However, it could be a difficult step if the housing market has changed over the time since you invested in your property, and you may find yourself making less than what you paid initially.
2. Refinancing: If you already have a sound financial health and credit score, you may refinance your balloon payment by taking out another loan. This new loan will add the leverage of extended time period to your current repayment, allowing you time to restructure your finances into a more feasible system. The only drawbacks to refinancing is that interest rates might rise and you cannot utilize this option without good credit and income.
3. Wait to Buy: If possible, delay your buying (a new home decision), so that you may not need to borrow a loan. Meanwhile you can stay in a rented home. Homeownership comes with many unexpected costs, so if you are not certain about your stay in new home and handling all finances then it is smart not to buy a one now.
Owning a home is a dream to many consumers in America, and there are a lot of mortgage brokers who are willing to take advantage of the people to trap them into a loan which they could not mange at all. So, it is advisable to always do thorough research and consult financial experts before engaging yourself into any financial commitment especially when it is huge like a balloon payment.
