Balloon Mortgages

A Balloon Mortgage is, in essence, a short term fixed rate loan that has lower monthly payments based upon a 30-year amortization loan. There are very distinct advantages and disadvantages to this type of mortgage- for instance: it allows the lender to borrow a larger amount, because their monthly payments are less, but the loan does not fully amortize (decrease the full principal loan balance) over the short time frame. This leaves the borrower with one large lump sum due at the end of the loan term, which is generally referred to as a balloon payment. Settlement costs might also apply.

This type of mortgage could be useful to a borrower who is planning on having a large amount of cash at this time (as with trust funds or inheritance) or planning to refinance or sell their homes within 5-7 years. Many times, at the end of the term, a lender will offer some conversion choices that will hinge upon certain requirements, such as the borrower being on time with most or all of the payments. These types of mortgages are called convertibles (7/23 or 5/25 convertibles).

Often times this built-in safety feature gives the buyer the best of the features of both the fixed rate and adjustable rate mortgages, because you are protected from rising rates during the term of the loan, and at the end you can choose to ,refinance if rates have gone down. The dangers are that after the term is completed the full amount of the loan is due, and if you don't make the payment and for some reason can' t refinance, you could risk going into foreclosure.

Make sure to check out the other popular Loan Programs as well, like Adjustable Rate Mortgages and Fixed Rate Mortgages.