Balloon Payments

When you negotiate a second mortgage home loan, also commonly referred to as an equity home loan, make certain that you are clear about any and all payments due at the end of the loan.

One way that some lenders make their second mortgage home loans appear more appealing is to defer part of the principal payment each month to give you what appears to be a very low monthly payment on your loan. Most people like the idea of a low monthly payment and many people grab these kinds of loans without fully realizing what they are in for at the end of their loan period.

Not making a full principal payment each month may be appealing in the short run while you are enjoying your artificially low mortgage payments, but at the end of your loan you may be in for a rude surprise, a hefty balloon payment.

What is a balloon payment? It is any principal which has not been paid at the end of your loan period. Balloon payments can be many thousands of dollars. To make your balloon payment you must either make a payment from your own funds or refinance the property and begin making loan payments all over again.

For those people who are fully aware of the approaching balloon payment this is seldom a problem. The problem arises when a lender has not disclosed the fact that there is a balloon payment at the end of the loan, or when a lender has glossed over the fact and not made the full extent of the payment clear to the borrower.

If it seems as if you are getting a second mortgage that’s “too good to be true” it just may be – ask your lender if your second mortgage loan is fully amortized or if there will be a balloon payment at the end of the term.