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Old 05-13-2012, 04:34 PM   #21
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Name: jim
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Balloon mortgages were popular in the 1980's when the mortgage interest rate was 14% and home values doubled and tripled in a decade. People would speculate that their home would increase in value thus they were not interested in the rate nor planned on living there for long. Thus they paid a minimum investment and small payments hoping that the increase in value was sufficient to cover the entire mortgage that would come due, normally in 5 years. Construction loans were also balloon as were persons who moved every 3-5 years due to their employment.
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Old 05-14-2012, 08:00 AM   #22
Name: RogerDat
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I think ballon mortgages are a commercial version of the older land contract. Which is making a comeback.

The high interest rates in the past (70's or early 80's as I recall) made selling a home difficult and drove down housing prices. Price of home is essentially a result of what income was required to afford mrtg. payments. Higher interest leaves less "monthly" for purchase price of house while still making payments high.

Sellers would draw up a contract where buyer agreed to monthly payments and purchase price to be paid in full three to five years in the future, that was the ballon payment.

The buyer would need to get a mortgage to payoff the ballon. But would have a few years of payment history, and the payment plus any increase in home value would provide equity.

Seller gained interest charged on land contract and had income to offset still having to pay the mortgage on the property allowing them to qualify for a mortgage on a different house. Plus had own mortgage payoff reduced by a few more years of payments.

At the end of the land contract both the buyer and seller and their banks would attend a closing where seller mortgage was paid off and a new one taken on by the buyer, land contract was fulfilled and title was transferred.

It worked ok for some, my sister and her husband sold their house that way when he took a job in another state. Interest rates were too high and the market was soft due to layoffs at the big three auto plants.

Commercial mortgage brokers created the ballon mortgage to meet the same need, rising housing prices made house down payment unaffordable and monthly payments high, but rising prices offered a good chance that five years down the road the owner would have equity to get new mortgage when ballon came due. Sweet deal for the broker because they get "normal" mortgage payement but it's 100% interest.
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