Assessing a Fully vs Partially Amortized Loan with Balloon Payment
Loan structures come in a variety of different flavors, with the chocolate-versus-vanilla debate revolving around fully amortized loans squaring off against partially amortized loans. What’s the difference between these two loan structures? What are balloon payments and how do they factor into the fight?
The world of mortgage lending is filled with different variations on the same basic home loan theme. Yet these variations represent far more than just changes in the window dressing- signing on to the right type of loan can save you a lot of money and a lot of headaches over the long run, while signing on for the wrong loan can provide the unfortunate opposite.
Two such variations on loans have to do with your amortization.
The first is a fully amortized loan; the second is a partially amortized loan with a balloon payment. Which of these is right for you?
Before you can determine which form of loan is best for you it’s a good idea to develop a decent understanding of what unique loan structures each of these terms refers to.
A fully amortized loan is a mortgage you take on where you pay it off in roughly equal installments over the life of the loan. So if you sign up for a 30 year mortgage you’re going to make about 360 equal payments. This is the sort of loan most people think about when they think about taking on a mortgage.
A partially amortized loan is a mortgage that works similarly to a fully amortized loan, but which incorporates what’s known as a balloon payment. Basically with this sort of loan structure you will pay off the majority of your mortgage with roughly equal monthly payments but at some point you’re going to make a large lump sum payment to finish off the remainder of your loan. Balloon payments are generally made at the end of a loan but they are occasionally paid at the start of the loan.
Which is Right for Me?
When faced with the decision between a fully vs partially amortized loan with a balloon payment tacked on to the end most people opt to take on a steady stream of equal monthly payments and that’s it. A fully amortized loan is simpler to understand and easier to predict, two qualities which many loan carriers favor. But that doesn’t mean partially amortized loans have no value. Partially amortized loans simply offer their own set of unique benefits which meet certain people’s needs perfectly.
For example if you set up a loan with a balloon payment at the end of the life of the mortgage you don’t necessarily need to make that payment out of pocket. Lots of people take on balloon payments and plan on selling their property when the payment comes up due, using the proceeds of the sale to settle the balloon payment and then using the remainder as a down payment on a new property.
Most of the benefits of partially amortized loans follow this model- they require a certain level of financial savvy and tricky timing but home owners who are ready, willing and able to play a complicated swapping game can post some great profits or trade up properties much faster than individuals who opt for the simplicity of standard fully amortized loans.
Ultimately there are a number of factors who play into your decision, but making the choice between a fully amortized loan or a partially amortized loan tend to depend on how willing you are to play the often profitable games balloon payments open up for you.
Understanding all the various scenarios that can occur that may be beyond your control, and what they may cost, can be estimated with a home mortgage calculator. Understanding the pros and cons of these choices can help you enter into the right contract with your eyes open wide.