Buying a home can be a time of excitement as well as frustration for the new home buyer. For potential homeowners who are struggling with credit verification and approval issues, considering alternative and creative ways of financing will provide the key to getting in the house you want. Of these creative financing options, many homeowners, with bad or unverified credit, are turning to the ballooning mortgage. As a homeowner, understanding the elements of a ballooning mortgage will ensure a more pleasant home purchasing process.
For home owners looking for a convenient method for loan approval, consider the ballooning mortgage as an affordable option for those with less than perfect credit. In the creative financing scheme, the ballooning mortgage allows the homeowner a seven year period to own a home while working to repair any outstanding credit issues or simply to establish a short term mortgage.
The advantage to the ballooning mortgage lies in the payments which are generally short, lasting only up to seven years, with the actual payment amount based on a 30 year mortgage. As a general rule, the interest rate on a ballooning mortgage is less than that of traditional mortgages.
Disadvantages to a ballooning mortgage fall into the events that transpire when the term of the mortgage is over. Following completion of the seven year period, the home owner must pay off the final balance of the loan either through a cash payment, sale or refinancing.
Commonly, as part of the ballooning mortgage approval process, the lender will require that a secondary piece of mortgage payment documentation be produced. This product, commonly referred to as the reset option is a document which outlines the payment arrangements of the ballooned principle at the time the term of the ballooning mortgage matures. The reset document will outline the anticipated payment, the expected interest rate, and terms of the mortgage following ballooning mortgage maturity. The advantage to a obtaining a reset option, when applying for the initial ballooning mortgage, is in the locked interest rate to be paid.
For lenders who do not require or permit reset options, the homeowner will need to prepare for what financing will take place at the end of the ballooning mortgage maturity period. In most cases, when a lender does not require a reset option, the theory is that the homeowner will sell the property thereby ending the real estate mortgage relationship with the lender.
As in any home buying experience, the key to optimal financial outcome, and purchase of the real estate, is in the home buyer’s education of the processes and financing options to be considered. For those homeowners who do not anticipate a long term commitment to a piece of real estate, the ballooning mortgage may provide for a convenient purchase without commitment beyond seven years.
