In Part One of this article I discussed Flipping: a method used be finance companies to generate fees from current customers by refinancing the customers loan repeatedly.
Now how does the finance company get an otherwise intelligent person to voluntarily spend money on more closing costs?
The answer is that they lead the borrower to believe that there is a benefit to the refinancing.
One method of creating the illusion of a benefit to refinancing is to introduce a “Balloon Payment” into the loan.
A “Balloon Payment” is generally used in home mortgages because it allows a borrower to pay a smaller monthly payment for a period of time with one final large payment. The theory is that by the time that the balloon payment comes due the borrower will have increased income or can refinance the amount due for the balloon payment.
In reality, in most cases, the balloon payment is nothing more than a way for the finance company to make a loan appear more attractive by focusing the borrower on the lower monthly payments rather than the long term obligation.
Many times when the balloon payment becomes due the borrower is not in a position to make the payment, leaving the borrower with bankruptcy as there only option to avoid foreclosure.
Balloon payments are generally a no win situation for the borrower.
In Part Three I will discuss various insurances products offered by finance companies.
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