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Tuesday, August 23, 2011

Balloon Home Loans - Risky Or Beneficial?

Looking for a loan to finance a home can be a tricky business, mainly because there are many type of loans out there. Picking the right kind of home loan can either benefit the borrower in some ways, or put him and his house together at risk. While it’s true that banks would try their best to come up with a loan offering that is best fits the borrower’s paying ability, it may not be true at all times.

One common type of loan is known as the balloon home loan. This type of loan provides the borrower with a long term wherein he can choose to pay only for the interest. At the end of the loan term, he would then need to pay for the loan amount in one lump sum payment. There is also an option that if the principal amount cannot be paid after the maturity period, a refinancing scheme can be applied. The loan term is usually set at around 10 years, with a low, fixed interest rate. The borrower can also elect to pay some of the principal alongside the interest, but is not required to do so. It is like lending an amount of money that can be paid at the end of the loan period, with interest being paid monthly.

Balloon home loans can either be good or bad for the borrower. It all depends on the purpose of the borrower for applying for such a loan, and on what term he plans to set for it. Without careful planning, this type of loan can prove to be a disaster waiting in the end. The worst part is that he may even end up losing his house. On the other hand, it can be beneficial in a way that not only would the borrower be able to pay at the end of the loan period, but can earn more along the way.

A balloon home loan is very ideal for people who buy and sell houses. It can also be a good choice if the buyer does not intend to have the house for a long time and plans to sell it before the end of the loan period. The equation is simple. Since the interest rate is fixed, the borrower can sell the house and would have earned an amount that is bigger than the interest that he is paying. Furthermore, the borrower can use the money on some other investments before finally paying off the principal amount at the end of the loan period.

On the other hand, if the house or property to be purchased is going to take a long time, then it could possibly be a risky problem. It may be beneficial in a way that the borrower would be able to use it to acquire a house, but must make sure that the principal amount would be paid in full by the end of the term. If the lump sum amount is not paid, then the borrow would risk giving up the house. While it’s true that a refinancing scheme is possible, it may not available by the time it is needed.

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