Balloon loans are becoming increasingly popular, and if you’re thinking about starting one, you’re not alone.
According to Bankrate.com, a mortgage lender analyzed data on all of the $719 billion of loans originated by homebuyers and lenders last year and found that the average balloon loan was 3.2 percent less than the average loan on the S&P 500, and the average home price was $250,000 less than a typical home on the same date last year.
The report added that “balloon loans were also significantly less expensive than comparable loans from other lenders.”
The good news is that while most balloon loans are subprime, they don’t have to be.
The average balloon mortgage was $8,500, while the average credit card loan was $9,600.
“You’ll likely get the same return on your balloon loan, especially if you have a smaller down payment,” says Peter Graziano, a partner at Rydberg Capital Management in New York.
“You may want to invest in a subprime loan,” says Robert Zimring, an independent mortgage broker and author of The Big Balloon: The Secret To Buying a Home Without a Down Payment or Mortgage.
“A subprime balloon loan is one you can get for the low interest rate, but not one you should do unless you have some credit.”
While a balloon loan can be the perfect investment for people who have been looking for a home for a while, many people with more traditional needs or mortgages will want to get a smaller loan to save on the cost of the home.
And while you might be better off with a home loan than a balloon, there are some things to keep in mind.
“The balloon loan will offer a larger return than the subprime or FHA loan, but they are less attractive compared to a home equity line of credit,” says Rydburg’s Grazian.
“The balloon is typically a cheaper option, but it’s more risky because the interest rate is usually much higher than a sub-prime line of loan.”
Rydberg’s Zimming recommends that if you do decide to get an FHA or subprime mortgage, “get a balloon as soon as possible.”
“You can see the balloon is going to be a very risky deal,” he says.
“If you’re on a fixed income and need to save for retirement, the balloon loan might not be the best choice.”
You can read more about balloon loans from Bankrate and Zimding.
The good thing about balloon mortgages is that you can borrow for as long as you like.
The bad thing is that there’s a risk that you’ll end up with a balloon debt.
“If you have balloon loans, you are basically taking on a loan from a company that can get the loan for free,” says Zimling.
“So you’re taking on debt, and that’s not something you want.”
The balloon loans can also offer a lot of different benefits, says Rymding.
“With the balloon, you have an investment vehicle that you’re making money on,” he adds.
“There’s not a lot to it.”
The best part about balloon loan payments, says Grazia, is that they can be paid off in less than three years.