What is a balloon loan?
A balloon loan is a type of short-term mortgage. The balloon loan is often compared to the fixed-rate mortgage, as it shares some of its features. For example, a balloon loan offers the borrower a level payment amount over the term of the loan. However, unlike fixed-rate loans, balloon mortgages don’t amortize during the original term. Instead, this type of loan may have one of many maturity types. When most borrowers take on mortgages, they obtain loans that will be fully repaid over a set amount of time. This length of time is referred to as the loan term. Balloon loans do have set loan terms, just like other types of mortgages. However, the monthly payments the borrower makes are not sufficient to repay the loan. As such, the borrower ends up owing a lump-sum payment, consisting of the remaining principle, at the end of the loan term. Often, mortgage borrowers take on loans that last for 10, 15, 20, or even 30 years. Once the borrower makes his final monthly installment payment, he
A balloon mortgage is usually rather short, with a term of five to seven years, but the payment is based on a term of 30 years. They often have a lower interest rate, and can be easier to qualify for than a traditional 30-year fixed mortgage. There is; however, a risk to consider. At the end of your loan term, you will need to pay off your outstanding balance. This usually means you must refinance, sell your home or convert the balloon mortgage to a traditional mortgage at the current interest rates. A balloon loan may be a good option if the initial rate is lower than that of an adjustable rate mortgage with a similar initial term, particularly if you are fairly confident you will be selling the home before the balloon term is over.
With a balloon loan, the buyer is expected to pay off the unpaid balance of the loan completely within a fixed period of time, usually in three, five, or seven years, instead of making regular payments to completely pay off the loan. The interest rate can be fixed or variable, but in all cases the (usually substantial) unpaid balance is due at the time specified. Usually, the borrower must either refinance or sell the home to pay off the loan. Because most payments at the beginning of the loan go to pay off the interest rather than the principal, the balance at the time of the loan payoff will probably be nearly the same as the original loan. To attract buyers, builders often offer balloon loans during periods of high interest rates when home sales are sluggish. In most cases, the interest rate will be lower than prevailing institutional home loan rates. However, if interest rates are high when full payment is due, refinancing may not be possible. The balloon will burst, resulting in f
