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Do I want a balloon loan?

QUESTION:

My husband and I have spent days searching for a balloon loan that does not have points or closing costs and that guarantees the lender will refinance when it comes to term. Our thinking is that we want to conserve our cash now and be guaranteed refinancing in the future.

We finally found what we were looking for and have just received our closing documents to review. We are surprised to see that closing costs are included in the loan balance and that the lender does not have an obligation to refinance in five years if we are late, even once, in our payments. Can this be right?

ANSWER:

First, you are not getting the "no closing costs" loan you sought. The costs have been included in the amount you have borrowed. The fact that you are borrowing the money to pay the loan’s closing costs as part of the loan does not change the fact that there are closing costs. This is a common practice but should have been made clear to you by the lender. This loan does meet your need of conserving cash now but has not really saved you any money in the long term.

Second, many balloon loans contain clauses that contractually obligate the lender to refinance the loan when it comes to term. This is what you sought but may not really be best for you in the future.

The home loan market is full of diverse products and areas of specialty lending. Each company seeks a certain client base and most sell their loans after they are made to a secondary market. What works for you today may be available from this lender now but what is best for you in the future may be found somewhere else. Your loan will come due in five years and your lender, like most, will be interested in refinancing it. They want the business. But it will probably be in your best interests, when the note comes to term, to shop around.

If you do have a commitment for the lender to refinance in five years, it is certainly subject to many conditions. A lender will always protect himself if the borrower’s credit has slipped for some reason. One late payment may be this lender’s method of determining a deterioration in the borrower’s economic health.

A lending institution will also protect itself if there is a dramatic change in interest rates, perhaps as little as a four-point change. There is probably a clause in your agreement that releases the lender when this occurs.

As with any contractual agreement, it is a good idea to have a professional review the document. Individuals do not usually buy homes with sufficient frequency to give them the experience of an expert. Be sure that you know what you have agreed to, what the lender’s obligations really are, and if what you initially sought is really the best for your situation.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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