Balloon loans are short-term mortgages that have some of the same features as a fixed rate mortgage. These loans provide a level payment feature during the term of the loan, which is typically 5, 7, or 10 years.
In contrast to the 30 year fixed rate mortgage, payments on balloon loans are typically interest only. As a result, the principal balance remains unchanged at the end of the loan term and the mortgage company generally requires that the loan be paid in full. This can be accomplished by refinancing the balloon mortgage.
However, many mortgage companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the current thirty-year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.
Other balloon loans are fixed for a longer period of time and require the borrower to pay down principal every month. For example, a 40/30 balloon would be a loan that has payments amortized over 40 years, but the loan balance comes due in 30 years. The rate is fixed on this type of loan for the full 30 years, but since the payments are amortizing over 40 years they a lower than a standard 30 year fixed rate mortgage.
Balloon mortgages are often a good choice for someone who is looking to keeping the subject property short-term and want their payments to be as low as possible.
Please use the resources available on this website to help you make an informed decision and if you have any questions along the way make sure to use the “Ask An Expert” feature.
