If you're in the market for a new home, a balloon mortgage is one of the numerous mortgage products available with which you can finance your purchase. Balloon mortgages are attractive to buyers because they often carry lower payments and interest charges than traditional 30-year mortgage loans. Unfortunately, after several years, the loan ends, and you must pay off the remaining balance you owe on the home in one lump sum. This is known as the “balloon payment.” Improper planning or a change in financial circumstances can make this payment an impossible goal for some homeowners.
If paying off the remaining balance on your home isn't an option, you can put the property up for sale. When you sell your home, the buyer's mortgage loan pays off your existing loan – taking care of the balloon payment for you. If you've built equity in the property, you might even have profit left over after the sale that you can use as a down payment on a new house. One drawback of putting your home on the market is that there is no guarantee that it will sell quickly or sell for the price you want. If your neighborhood suffers from numerous foreclosures and short sales, your property value might have dropped. In cases like these, a home priced at fair market value can sit on the market indefinitely. If you don't have much time before your balloon payment comes due, attempting to sell your home could be a risky venture.
One alternative to paying your mortgage's balloon payment is to refinance the payment into a new loan. This allows you to continue making monthly payments on the property and avoid one large, lump-sum charge. Refinancing comes with its own set of risks, however. Because you are taking out a new mortgage, you must meet the lender's qualifications. If a recent job loss or credit problems render you ineligible for the new loan, you won't qualify for refinancing. Keep in mind that any time you refinance your mortgage, you must pay closing costs for the new loan.
If your balloon loan comes with a conversion option, you can convert your balloon mortgage to a traditional 30-year mortgage when the balloon payment comes due. Although similar to refinancing, conversion does not require you to re-qualify for a new loan. Your payments and interest rate are based on your existing loan. Although loan conversion might sound like the ideal solution to your balloon payment problem, you must check your original loan documents to ensure that loan conversion is an option. Not all lenders offer this feature.
If your loan doesn't contain a conversion option, you don't qualify for refinancing and you cannot sell your home, walking away from your mortgage might seem like the only available option. Allowing your home to go into foreclosure, however, carries serious consequences. Not only does foreclosure destroy your credit rating, but you also could still be on the hook for your mortgage balance. If the price the lender receives after selling your former home does not cover the amount you owe, your lender can sue you for the remaining debt.
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