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Balloon vs. Fixed-Rate Mortgages

Date Published: Sep 27, 2022

Couple happily signing mortgage papers for a house

You probably already know this, but buying a house is one of the biggest financial decisions you will make. Not only is it a large purchase, but it will impact your finances for years to come, and part of buying a home is choosing a mortgage. When choosing a mortgage, there are two terms that will play a big role in helping you decide. These terms are Balloon and Fixed Rate mortgage.

These two terms are also two big types of mortgages that most people look into when buying or re-financing a home, and Wildfire offers each of them. Deciding which is right for you is another task in buying a home. We want to help you in closing the door on which option is best for you when the time comes to make a choice. 

Balloon Mortgage

A balloon mortgage, which is typically more common in commercial real estate than residential, requires you to fulfill repayment with principal and interest payments during the balloon term. Then repayment of a lump sum of the remaining balance at the end of the balloon period.

Balloon, as well as fixed-rate, mortgages also use a fancy loan term called amortization, which refers to spreading out the repayment of a loan, including the principal, interest, and other costs, into periodic or monthly payments.

With a balloon mortgage, the amortization period is longer than the term of the loan. This results in the lump sum payment at the end of the loan term.

For example, let’s say you have a mortgage of $150,000 with a 7 year loan term, a 360 month payment calculation term (amortization), at an interest rate of 5.25%. With a Balloon Mortgage you may pay $828.31 per month leaving a lump sum of $133,654.63 that you would have to pay at the end of the 7 year term.

If interest rates happen to be high when you sign up for a mortgage you will have the option to possibly refinance at a lower interest rate when the balloon term is up.

If you are someone who plans to refinance your loan before the final payment is due, or you are planning to sell your house before the loan term ends then a balloon mortgage might be the best route for you.

Fixed Rate Mortgage

On the other side of things a fixed-rate mortgage is a home loan that has a fixed interest rate for the whole amortization term. With a fixed-rate mortgage, the amortization period and the loan term are the same. Meaning that the interest rate of the loan stays the same from the time you sign up to when you make your last payment. You will pay the same amount every month, no matter how the market conditions change!

If you are looking for a place to call home for the long term, then a fixed-rate mortgage is your best route to take. They are low risk and will help you to save money overtime as housing market conditions rise and fall.

Which One is Best for Me?

If you are looking for a temporary place to call home or you are looking to refinance in a few years then a balloon mortgage may be the one for you. You will be able to pay off the loan with the money you receive from selling or refinancing your house.

 If a long-term home is the goal you have set for yourself when purchasing a home, then a fixed-rate mortgage is going to be your go to loan. You will have peace of mind knowing your payments will be the same every month no matter how crazy the housing markets get.

We’re Here for You

Whether you are ready to apply for a mortgage or are looking for some more guidance, don’t hesitate to get in touch with us and explore our loan options. We will be there with you every step of the way and provide you with the mortgage plan that you are looking for.