Everybody knows about the Adjustable Rate Mortgage (ARM) but not many know about a balloon loan and how it can help individuals manage their financial needs without getting into the EMI hassle. This type of mortgage has been around for decades now but it is not as advertised and used as other types. In this article, let’s learn what a balloon loan is and how it is paid back.

What is a balloon loan?

Balloon mortgages are very risky for the lenders because the repayment comes at the end of the term and hence, this loan is given to individuals and businesses with excellent credit history. Construction industry is one of the biggest users of balloon mortgages where a loan is provided for the construction of a project for a short term without a collateral. This loan also has an extremely high interest rate which is understandable given the risk involved with the loan.

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Balloon mortgage structure
The structure of a balloon mortgage depends both on the lending institute and the borrower. This loan can have a fixed interest rate or variable interest depending on the lending bank. Further, the payment methods are decided based on the credit history of the borrower. In some situations, the banks may ask for interest-only payments every month and then a lump sum repayment. In other situations, the borrower might be allowed to pay the whole amount at the maturity.

How are balloon loans paid back?
A balloon loan seems very easy in the beginning but it is actually a time bomb which has the capacity of taking down everything you own if you haven’t planned the repayment system properly. Financial experts say that if you plan to go for a balloon mortgage, plan the repayment first because not everything goes as planned and when the due date will arrive, you may or may not have earned enough money. Following are the few ways in which balloon mortgages are settled.

• Refinance
  Refinancing the mortgage is one of the most common methods used to repay a balloon mortgage. This method will settle the mortgage once and for all and start a new loan which has its own interest rate and repayment term. In order to get a refinance, you have to be able to qualify for it. For this you will need a good credit score and a constant income that you can prove to the bank.
• Sell assets
  A balloon loan can be easily paid off by selling the assets that you own. The asset can be the one you bought with the mortgage or some other property that you own.
• Pay back
  Paying back is a good option but a rare one because if cash wasn’t a problem, you would not choose a mortgage. So, if you have cash coming in, use it to pay off the mortgage.

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