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Why A Balloon Home Equity Loan May Not Be All Fun
By EchoBay Loans Staff Writer

When you think of balloons you may associate them with fun, festivities and parties with bright colors and great food. When you hear the term balloon home equity loan you probably assume that it's as innocent as any other home equity loan. While it's true that balloon home equity loans may be great for some consumers, for those who don't really understand what these loans are about, it can be a living nightmare.

Imagine that you have taken a loan out against the equity you have built in your home. You make the minimum monthly payments on time every month. Five years from the date you took out the loan, you receive your monthly statement in the mail. Instead of having to pay your standard monthly payment of $400 a month, your statement reflects that the payment you must make amounts to thousands of dollars. You've just been hit with a balloon payment. Now the balloon part doesn't seem so fun.

Balloon payments are not uncommon to second mortgages. Normally when a consumer takes out a balloon home equity loan, the monthly payments that they are making are applied to interest only or to just a small portion of the principal. When the term of the loan is over, the unpaid principal becomes immediately due or the consumer risks losing their home and the equity they have built in it. For instance, if you take out a five-year balloon home equity loan of $40,000 and your monthly payments are only going towards principal, you'll have to come up with $40,000 at the end of that five-year period to pay off the balloon payment.

So why is a balloon home equity loan so appealing to consumers at first glance? The monthly payments that come attached to balloon home equity loans tend to be much lower and more manageable than the payments associated with traditional loan types. This is because with a traditional loan, your monthly payments are paying off the total principal and any interest associated with the loan and with a balloon home equity loan your payments are not paying off this critical amount.

The balloon payment that is due at the end of a balloon home equity loan comes attached to many risks. Many consumers make the mistake of thinking that they can easily cash-out refinance their home to make the balloon payment that will be due at the end of their loan. Unfortunately, relying on a refinance as the security for your home can be a costly mistake. One can never predict where interest rates are going to go, and if interest rates rise too much, you may not be able to meet the monthly payments that would be required to refinance your loan.

If you plan on selling your home to pay off the balloon payment, you're going to want to consider your home's value and the market trends in your area. If homes take a long time to sell or property values don't increase or even decrease, you might have a problem getting the cash you need from a sale to pay off the balloon payment. If your balloon payment becomes due before you are able to sell your home, or if you can't sell your home for enough to meet the payment requirements, you could risk losing your home, losing your equity, and possibly ruining your credit.

Even though a balloon home equity loan has its risks, there are times when it makes sense for consumers to pursue this type of financial product. For instance, if you need to borrow funds to get your home ready to sell, chances are likely you'll sell your home before the term of the balloon home equity loan is up. In this case, it wouldn't be a bad idea to take advantage of this type of loan.

If you're currently thinking of taking out a balloon home equity loan, make sure that you analyze the above factors. The last thing you want to do is find yourself in the situation of losing your home because you didn't fully understand that the term balloon payment didn't mean a party that you would throw at the end of your loan term.

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