Why would he finance with a balloon loan?
I want to make an offer on a home that isn’t yet on the open market, but the owner is in financial difficulties. I have to wait for my loan application to be approved before I talk to him. Meanwhile the agent in the area that I have consulted tells me she managed to talk with him briefly, and learnt that he is in difficulty because he can’t meet a balloon payment.
Not wanting to show my ignorance I said no more then looked up a definition.
Why would he have taken out this type of loan instead of a home equity one? Does he not have an option to negotiate to change the payment for another loan?
To answer your last question first, some lenders will allow the conversion of the balloon payment into a traditional loan when the time comes, but it has to have been a stated option beforehand, and the probability would be at much higher interest rates.
At the time he took the loan put, he probably forecast one of two options- that he would sell that property prior to when the balloon was due (5 to 7 years later is the norm, although there are some 15 year periods) or he was expecting a financial windfall in that period, an inheritance, large dividend payments, something of that nature. So it made sense at the time, with the payments calculated over 30 years, meaning easy low repayment schedule in years 1 to 5 or 7, and a low down payment.
A real risk for the first time home owner or investor who has made a bit of a gamble or doesn’t put something aside right from the start to ensure the balloon can be paid later.
If he can’t refinance , he has to sell, regardless of the market
conditions, maybe at a price less than anticipated, or face foreclosure.
often losing his equity or most of it.
From – http://www.aclusa.info/home-equity-loans-definition/
Three Terms Every Mortgage Holder Should Know
Getting a mortgage can be a very confusing process. There is a lot of paperwork to sign, documents to read and procedures to be followed. You’d think you were applying to go to Harvard or Yale, except they don’t require that much paperwork for you to be admitted! Although getting a mortgage can be a confusing process, there are three terms that every mortgage holder should know to better understand what he is she is getting into.
Going into a mortgage knowing just a few facts will help you immensely in understanding what type of commitment you are getting into.
The first term you should understand is, amazingly, the word “term”. Term refers to the length of the mortgage you are taking out – or the amount of time you are making payments.
Many mortgages run the gauntlet of between ten and thirty years. The longer the mortgage, typically the lower your monthly payment will be (and the more interest the mortgage company makes). Generally speaking, you should go for the shortest term you can comfortable afford – you’ll save potentially tens of thousands (and in some cases potentially over a hundred thousand) dollars in interest by keeping the length of the mortgage as short as you can.
Next, understand the interest rate on your mortgage and how it is calculated. The interest rate refers to the amount of interest charges you will pay for the money you are borrowing, expressed as a decimal – such as 5.2 for 5.2%. Is it fixed or adjustable? In other words, is it the same through the life of the loan or does it change at specified periods in time? Most home buyers should try and steer clear of adjustable rate mortgages even though they can look better up front. They can often reset to higher interest rates and come back to bite you if you aren’t ready for a jump in your monthly payments!
Finally, understand what closing costs are and how they are going to affect your purchase price. Often times, you are going to be responsible for coming up with these closing costs out of your own pocket. Closing costs consists of things such as appraisals done on the house, attorney fees, notary fee, deed fee – if there is a fee they can think of it usually falls under the term closing costs! Be a smart and savvy consumer, if you see a fee that you don’t understand or doesn’t seem right – speak up! Some mortgage lenders try to sneak in any fee they can think of to make a few extra dollars profit.
Understanding these three terms can help make you a more informed home buyer and help you find the mortgage that is right for you. As with any product, it is important to shop around for a mortgage when you are considering buying a house. Even a small change in the interest rate between two lenders can often to amount to thousands of dollars in savings. Don’t be afraid to comparison shop – it’s your money after all!