A HELOC is a loan that’s set up as a line of credit, that’s backed by your home as collateral. It can be drawn from up to a certain dollar amount and has a “draw period” where you use it like a checking account. It also has a repayment period, usually lasting 10 to even 30 years. In addition, it uses simple interest calculated daily. That interest is based on the amount you owe as opposed to amortized interest, which is calculated monthly based on a schedule. A HELOC is a way to put your whole paycheck to work each month to pay down your mortgage fast. But you may wonder: “will I owe a balloon payment?”
Balloon payment definition: A large, one-time payment attached to a loan or mortgage at the end of a loan term.
A home equity line of credit is a financial tool that can help you achieve your financial goals. For example, you could pay off your mortgage, consolidate debt, or access your equity for educational or other unexpected expenses.
Some HELOCs are structured with a balloon payment at the end of the term. As mentioned above, a balloon payment is a payment-in-full that’s due at the end of the loan’s draw period.
Will I Owe a Balloon Payment for My HELOC?
There can be advantages to balloon payments in some instances. They may have lower initial payments. That makes them potentially ideal for borrowers who are low on cash in the short term but expect to have increased cash flow in the future. However, if your goal is to pay down your mortgage quickly, you’ll want to avoid any HELOC with a balloon payment. Instead, get one with a repayment period – or at least refinance it into a new HELOC before the balloon payment comes due. But even better, you can pay it off in full before the repayment period ends. Just use the proven strategies we outline here.
Lenders structure home equity lines of credit in a variety of ways. For that reason, any time you’re considering a HELOC or other mortgage option, it’s important to compare plans among competitors. You need to ensure you’re getting the terms that are most favorable to you and your financial situation. Our preferred lender offers the industry’s most borrower-friendly terms. (No balloon payment!) And we’d like to talk with you about your options. You can learn more about whether a HELOC is the right approach for your financial situation by taking our in-depth survey. Or explore other HELOC benefits like lower up-front costs, simple interest calculation and payment flexibility on our resources page.