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A balloon mortgage offers an initial interest rate that is lower than fixed-rate mortgages. It keeps this low fixed mortgage rate for five to seven years and then requires a 'balloon' payment. The balloon mortgage payment is the final payment of the loan and pays off the entire balance on the mortgage.
Monthly payments for the mortgage are low because the payments for those first five to seven years are amortized at a low interest rate over the total length of the loan. If you plan on either selling your home, paying the mortgage off, or refinancing it before the balloon payment is due, then this type of mortgage is good deal. Balloon mortgage loans are short term mortgages that have some features of a fixed rate mortgage. The mortgage provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon mortgages do not fully amortize over the original term.
Balloon mortgages can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. At the end of the mortgage term there is still a remaining principal mortgage balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing.
Many companies have other options such as a mortgage conversion feature at the end of the term. For example, the mortgage may convert to a 30 year fixed loan at the 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 mortgage payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible. Best for people who: - " Plan to sell or refinance their homes before the loan expires."
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