A Balloon mortgage is a home loan designed for a borrower who only plans to hold the mortgage for a short term. They are often called hard money loans that investors use to flip houses or as a bridge loan. However in the end they didn’t just flip houses, these loan products flipped the world of finance and the US economy on its face.
It is an exotic financial product that will often cause a borrower to go into default.
How Balloon Mortgage Products Work
These toxic financing agreements can come with a variety of terms. Traditionally they all follow a short-term mortgage arrangement in which the borrower may have extra low monthly payments for one to six years followed by a sort of mortgage reset resulting in rapidly increasing payments or even one large payment in which the entire loan balance will be due. They are often obtained through hard money lenders.
The type of mortgage is meant for borrowers who are planning on selling or refinancing a property shortly after obtaining the mortgage. This mortgage product is suited for small investors as a bridge loan in some cases.
These loans have caused many borrowers to default on their home mortgage loan. This can result in foreclosure and the loss of the home if the borrower is unable to stop foreclosure by refinancing.
Why Do Home Loan Borrowers take Balloon Home Financing
Borrower Loan Benefits
These loans can be great for short-term borrowers, or a real estate investor because they have low initial monthly payments because they don’t include any principle.
They can act as a bridge loan for deal makers or may be helpful for homeowners who plan on refinancing into a more traditional mortgage loan such as a fixed rate mortgage.
A balloon mortgage is about as risky as it gets in regards to the traditional Homeowner this is due to the rapidly increasing monthly payments which is the very nature of the balloon mortgage. But to an investor who plans on flipping the property it can prove to be a profitable tool.
These products usually require the borrower to pay points or other origination fees which is profit and black in the ledger.
Interest rates are often higher than the typical fixed rate or adjustable rate mortgage loans.
The lender is able to add higher than average yield without having to worry about reinvesting principal.
Popping the Balloon – The Resulting Financial Disaster
Through 2007 everyone was making money with these exotic mortgages. Loan officers made their commissions, mortgage servicers collected there fees, real estate investors flipped their properties, Lenders sold their bundled mortgage bonds, and wall street collected their higher and higher yield. All was well until the bubble burst and borrowers could no longer sell the house or refinance the house. so servicers did not collect, loan officers had no more borrowers eligible, and lenders and wall street were fired, arrested, sued, and booed. The Housing bubble busted.