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Balloon loans and high loan-to-value mortgages
If you are shopping for a mortgage you may have realized
that there are many different
types of mortgage plans to choose from.
Some of these plans are obviously a lot better than
the others, so it is important to research the options.
Two of the most common types of mortgage products are
the fixed-rate mortgage and the adjustable-rate mortgage.
But there are a variety of other mortgage
plans out there that consumers should be very wary
of.
Two such mortgages are Balloon loans and high loan-to
value mortgages, and these can be very risky and end
up costing you a lot more money than is necessary.
In two back on Bankrate.com entitled, “Risk
of high LTV loans,” and “Balloon Loan pitfalls,”
there is information on why you should not go with one
of these two loans.
The first loan to look out for is the high loan-to-value
mortgage which is an absolute no-no.
“High loan-to-value products raise a borrower's
debt level above the value of their home to as much
as 125 percent.”
So basically, with this type of loan you are taking
out more
debt than your home is worth. This is just asking
for trouble.
“For example, if you have a house worth $100,000,
a first mortgage of $90,000, and a home equity
loan of $35,000, you owe $25,000 more than your
house is worth. That's crazy. It's an unsecured loan,
like a credit card.”
“Imagine selling your home and having to pay off
the mortgage, plus having to come up with $25,000 at
closing to pay off the home equity loan. Also consider
that the interest on the amount that exceeds your home's
value is not tax-deductible.”
Now this seems like a pretty easy concept to understand,
but people still get scammed by loans like this all
of the time.
Next we have the balloon loan which is also a tricky
little guy to watch out for. Balloon loans are a little
different from the high loan-to-value mortgage because
they seem good in the beginning but end up resulting
in a very bad choice in the long run.
“With a traditional
mortgage, each monthly payment comprises principal
plus interest. In the early years of the loan, most
of the payment goes for interest. Gradually, more and
more of the monthly payments go toward principal. At
the end of the term, the loan is completely repaid.
This process of paying principal and interest until
the loan is paid off is called amortization.”
“Some equity debt is not fully amortized. The
principal is not paid off at the end of the loan term.
This is especially the case with some credit lines.
At the end of the loan term, often 15 years, all of
the outstanding debt is due in a lump sum. This is called
a balloon payment.”
The problem with balloon payments is they can catch
you off guard because you are not prepared to pay the
lump, “balloon,” sum at the end.
“Be careful with loans with balloon features.
Steer away from them if you can. If you end up getting
a credit line with a balloon payment, don’t let
it catch you by surprise.”