Balloon mortgages would be good in only two situations:
you’re not planning on living in the house very long, so you likely exit before the balloon payments hit.
you believe interest rates will decline in the next few years and you can refinance to a fixed low rate
I don’t ever see myself using a Balloon mortgage. Worse, they are frequently sold via predetory lending methods. Unsavvy buyers are convinced to take a balloon mortgage not understanding the payments will rise dramatically in the years ahead. This can lead to eventual foreclosure when the owners can service the higher payments.
If you’re not planning to live there long, I don’t think you shouldn’t be buying; that’s one of the few times I’d choose to rent. I guess maybe if home prices are rising then you can accrue some equity, but then you risk buying at the top of the market. I genuinely how it would compare to a fixed rate mortgage though.
If you think interest rates are going to decline, you can easily refinance a fixed rate mortgage as well. I don’t see any benefit in that scenario, but there’s a downside in that if rates don’t go down you still have that balloon payment to worry about, and if you don’t qualify for a traditional mortgage, you’re really in a bind.
Maybe if you’re flipping a house it makes sense, especially if you want to minimize cash outflow. Otherwise, there are so many more downsides that are much more severe than the mild upsides that you might gain. Perhaps there’s a few niche applications that I haven’t considered though.
Balloon mortgages would be good in only two situations:
I don’t ever see myself using a Balloon mortgage. Worse, they are frequently sold via predetory lending methods. Unsavvy buyers are convinced to take a balloon mortgage not understanding the payments will rise dramatically in the years ahead. This can lead to eventual foreclosure when the owners can service the higher payments.
If you’re not planning to live there long, I don’t think you shouldn’t be buying; that’s one of the few times I’d choose to rent. I guess maybe if home prices are rising then you can accrue some equity, but then you risk buying at the top of the market. I genuinely how it would compare to a fixed rate mortgage though.
If you think interest rates are going to decline, you can easily refinance a fixed rate mortgage as well. I don’t see any benefit in that scenario, but there’s a downside in that if rates don’t go down you still have that balloon payment to worry about, and if you don’t qualify for a traditional mortgage, you’re really in a bind.
Maybe if you’re flipping a house it makes sense, especially if you want to minimize cash outflow. Otherwise, there are so many more downsides that are much more severe than the mild upsides that you might gain. Perhaps there’s a few niche applications that I haven’t considered though.