Looking At Investment Property Financing Options?
Balloon Mortgage Pros and Cons
Many investment property owners are turning to balloon mortgage loans. A balloon mortgage is a loan that requires a borrower to pay a large amount of the loan at the end of the loan (usually about 5 to 10 years). These loans are often enticing to many property management investors in Raleigh because the full amount of the loan does not amortize over the life of the loan resulting in lowers payments and interest rates. Smart property managers carefully calculate how much to charge for rent based on their intent to sell, refinance or pay the balloon before the end of the life of the loan.
For this reason, Balloon Mortgage Loans may not be ideal for the long term investor.
How to Assess The Risk
- Property investors must feel confident it is unlikely the housing market will collapse or interest rates will rise significantly.
- Feel comfortable with selling or refinancing because the credit needed to refinance in the future may not be available.
- Feel confident that interest rates will stay low, wages will increase and home values in Raleigh will continue to appreciate.
Because property investors enjoy lower monthly payments they are often able to qualify for higher loan amounts. In a nutshell, an investor can afford a nicer home in a better part of town and therefore charge higher rent. However, it also means the balloon amount is larger too. Balloon mortgages favor property managers who expect their rental income to increase steadily as incomes and home values rise in Raleigh. Some analysts predict that home prices will increase at twice the rate of inflation.
Before deciding on a balloon mortgage loan compare your financing options.
Look carefully at a 30-year fixed, 15-year adjustable mortgage, 5/1 adjustable (ARM) and 7-year balloon mortgage. Most likely the total cost of a 7-year balloon mortgage will win every time. As an investor, you must ask yourself if the savings offset the risk.
Beyond the economic risks, many investors must look inward and honestly access their attitudes towards the pending balloon payment. A balloon payment mortgage may be just another investment tool to one property investor but to another, it may feel like a 5-year ticking time bomb. The later investor may be impeded by their fear and fail to make important decisions about their loan.