While getting a loan for your home may seem fairly simple and straightforward in concept, there are actually several different types of mortgages. There are also some pretty massive differences between the different types, especially when it comes to how much money you will end up paying and when you will be paying. To help you out, here is a comparison of two popular loan types: fixed-rate mortgages and balloon mortgages.
What is a fixed-rate mortgage?
With a fixed-rate mortgage, you will acquire a loan for a certain period of time at a very specific interest rate. When combined, these two factors give you a comprehensive schedule that tells you exactly when you need to make each of your payments. Every payment will be the exact same, and the schedule will last for the entire duration of the loan.
What is a balloon mortgage?
A balloon mortgage is very similar to a fixed-rate mortgage, but often lasts a fraction as long. While an FRM might last for 15, 20, or 30 years, it's common for balloon mortgages to be less then a decade long. For each of your payments, you will only need to make small payments, roughly comparable to payments that you would make on an FRM.
The big difference is that you will need to pay the entire outstanding balance after the duration of the loan is up. This means that you will only pay a fraction of the mortgage over the course of the actual loan, and the rest in a single huge payment.
When is a fixed-rate mortgage a better choice?
If you can't pay for the price of your home over the course of a decade, then a fixed-rate mortgage will often be a much better option. Although you may end up paying a bit more over the full course of the loan, you will also have a much easier time managing each individual payment. Without the threat of a huge final payment looming on the horizon, you might find yourself with better morale and budgeting might be much easier.
When is a balloon mortgage a better choice?
On the other hand, if you know that you will have enough money to pay for your home sometime in the next decade, then a balloon mortgage can end up saving you money in the long run. If you make substantially more than you would need to make monthly FRM payments or if you are just getting a large sum of money at some point in the next few years, then a balloon mortgage can be easily affordable. Contact a residential real estate lawyer for more information about your homebuying options.