Let us analyze these two scenarios.
Balloon loans are mortgage loans that require you only to pay for the interests (and sometimes a small portion of the capital) till the end of the repayment program. Once the loan term finishes, you are required to put down a lump sum that is usually equal to the whole loan capital or a big part of it.
These loans are perfect for those who can not afford high monthly payments but from time to time have high incomes they can put aside into a savings account to cope with the lump sum payment when the loan term ends.
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Refinancing Into Balloon Loans
Knowing what balloon loans are you can probably imagine in what situations it would be advantageous to trade in your outstanding mortgage loan in exchange for a balloon loan. Since balloon loans charge only small monthly payments, if you can no longer afford the monthly payments on your current mortgage due to being unemployed or due to any other unexpected circumstance that reduces your income dramatically, it is a good idea to refinance and obtain a balloon loan .
With the balloon loan you will be able to repay your current mortgage balance and obtain small monthly payments in return. You should bear in mind that even though the payments will be affordable, this loan requires a lot of discipline and the eventual recovery of your saving ability. Otherwise, when the time comes and you need to pay off the loan's remaining balance, you may not be able to do so and you may risk repossession of the property.
Refinancing Out Of A Balloon Loan
If that happens or you just need a few years of low payments or you are currently on a balloon loan reaching the end of the repayment program and you fear that you will not be able to save enough money for the lump payment, it is time to refinance out of your balloon loan. By doing so, you will replace your current loan with a regular home mortgage loan with a longer repayment program.
This of course will imply that you will have higher monthly payments for a period of up to 20 years. You will have spent a lot of money in terms of interests with plenty more to pay over the whole life of the loan but you will get to keep your property and eventually fully own it when you repay the whole loan.
Refinancing out of a balloon loan is essential if you can not cope with the lump payment. In order to turn the transaction less expensive, if you do have savings, you can use them to make higher monthly payments and reduce the length of the new loan.
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