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Home » Business And Finance Articles » Balloon Home Loans Be Careful

Balloon Home Loans – Be Careful

In this modern economy, lenders provide loans tailored to just about any situation. Balloon loans are one such loan, but carry a serious downside if you're not careful.

Balloon Loans

A balloon loan has nothing to do with hot air or floating around the world in 80 days. Fail to plan very carefully when using one of these loans, however, and your financial world will definitely go down in flame like the Hindenburg.

A balloon loan is a mortgage with a fixed interest rate for a set period of years. Unlike traditional fixed rate home loans, the interest rates on balloon loans are nearly as low as those found on adjustable rate mortgages. The problem with balloon loans, however, is the term.

While balloon loans provide a low fixed interest rate for a set period of years, those years are not in abundance. Instead of a fifteen or thirty year repayment term, a balloon loan typically has a term of seven to ten years, depending upon what the lender was willing to give you. At the end of the term, you must repay the balloon loan in full. Yes, in full. Let's take a look at how this can play out.

In 2005, you find a home you love but can't qualify for a loan. You are so engrossed with the loan that you eventually locate a lender willing to write you a balloon loan. The loan is for $400,000 and has a 7 year term. At the end of the seven years, you've paid the loan down by $50,000, but still owe $350,000. Somehow and someway, you must come up with that $350,000 to pay off the loan. If you don't, the lender will foreclose on the home.

Every borrower that goes with a balloon loan fully intends to refinance the property before the balloon blows. While this makes sense, you have to keep in mind that refinancing is no sure thing. Maybe you can, but maybe you can't. Also, we are experiencing some of the lowest loan rates every seen. Chances are very strong that in seven years, rates are going to be much higher. Are you really going to be able to afford those rates?

Balloon home loans are all about seeing the future. In essence, you are pulling out the tea leaves and betting on rates in 2012 or so. If you get it wrong, your financial life can become a nightmare.

And here is another random article you might be interested in...

No Bubble Burst in 2006

No bubble-bursting is in sight for real estate sales in this new year of 2006. This is now expected to be the second best year in history for residential property sales, according to analysts at the National Association of Realtors. "Home sales are coming down from the mountain peak, but they will level-out at a high plateau â€" a plateau that is higher than previous peaks in the housing cycle," said David Lereah, NAR's chief economist. "This transition to a more normal and balanced market is a good thing."

Even though mortgage rates have edged downward in recent weeks, they will generally trend upward during the year, probably to about 6.6 percent for a 30-year, fixed-rate mortgage, NAR predicts. Existing home sales, expected to reach about 7.1 million units in 2005 (when final figures are available), will probably decline a bit in 2006 â€" perhaps by about 3.7 percent to a volume of 6.84 million units. New home sales will be about 1.29 million units in 2005 and will probably drop by 4.8 percent to 1.23 million units this year. That would make this year the second best on record for new home sales.

"The housing market still is fundamentally healthy," said Dave Wilson, president of the National Association of Home Builders. "Many builders sense some tapering off of buyer demand because of resistance to high prices and rising interest rates, and many companies have begun offering certain incentives in order to maintain their sales and production." Confidence of home builders during December slid from its summer peak, yet remained well within the positive range, according to NAHB.

Thomas Stevens, NAR president, made this comment: "Housing has always been the soundest investment for most families. As the old saying goes, homeownership beats the heck out of a drawer full of rent receipts.