Utah mortgage lenders offer a variety of complex mortgage options to homebuyers.  You have the option of 30, 20, and 15-year fixed rate mortgages.  An adjustable-rate Utah mortgage can come in 1, 5, 10, 15, 30, and even 40-year packages.

And, this is just the tip of the iceberg!  Fixed-rate and adjustable-rate mortgages all have a number of other complex details that add up to make the whole process overwhelming.

Unfortunately, there are other aspects of mortgages available as well.  Balloon payments are another option Utah mortgage companies may throw in your direction from time to time.

What is a Balloon Payment?

A balloon payment is when you pay your mortgage in full after an agreed-upon length of time.  For example, your mortgage may be amortized over a period of 30 years (meaning you pay the loan in monthly installments as if you were paying it off on a 30-year schedule), but agree to make a balloon payment in five years.

When that five-year period is up, the entire balance of the mortgage is due.  If you are paying your mortgage off on a 30-year schedule, most of the payments you make within the first five years go to interest.  When you pay off the balloon payment, you’ll be paying off an amount very near to the original principal of the mortgage.

When Should I Agree to a Balloon Payment?

Balloon payments are typically not a great option for homebuyers, and are much more suitable for savvy real estate investors.  To make balloon payments attractive, Utah mortgage companies typically offer an extremely low interest rate to investors.

Agreeing to a balloon payment allows investors to free up money otherwise dedicated to making higher monthly interest and principal payments.  They then can allocate this money for other purposes.

Other reasons investors may choose to agree to balloon payments may include an expected tax refund in the near future, inheritance becoming available, investment dividend distributions, or the securing of venture capital.

Converting Your Loan

If, for some reason, you decided to purchase your home using a balloon payment system, and the capital you were expecting to have suddenly isn’t there, many lenders will allow you to convert your balloon payment mortgage to a more traditional mortgage.

Foreclosures result in all sorts of stresses and financial difficulties Utah mortgage companies would rather avoid, so be sure to communicate with them if you believe you will be unable to pay your balloon payment when it is due.

However, make sure this is an option in your original mortgage contract, and be sure you are willing to pay a higher interest rate when you refinance your balloon mortgage.

As long as you have maintained good credit and have met all of the other requirements of your Utah mortgage, most companies will be willing to work with you.

What is the Best Advice on Balloon Payments?

Balloon payments typically get your attention because of their extremely low interest rates.  However, for first-time home buyers and inexperienced real estate investors, they are a very high risk.

You should only agree to a balloon payment if you are extremely sure you’ll have the money needed at the time payment is required.

Another option that carries less risk is an adjustable-rate mortgage.  But, beware, because adjustable-rate mortgages include interest rates that are initially low, but again can rise to become quite high.

Now you know a little bit more about yet another mortgage option.  The wisest things you can do to protect yourself from financial disaster are to research your options thoroughly and work with a mortgage lender you trust.