What is a Balloon Mortgage?
A balloon mortgage is a short-term loan that offers lower monthly payments (and usually a lower interest rate) than a traditional fixed-rate mortgage because it’s not fully paid off at maturity. It’s so named because, at the end of the loan term, your monthly payment “balloons” to include payment of the outstanding principal. Basic features Most balloon mortgages have a term of either five or seven years but are amortized over 30 years. In other words, the amount of your monthly payment is based upon a schedule that would require you to make continuous monthly payments for 30 years in order to pay off the loan. But, because the term of the loan is so much shorter than this, you are left owing an outstanding balance. Usually, this amount must be paid off through refinancing the loan or selling your home. For example: Term: 5-year balloon mortgage Principal: $200,000 Interest rate: 6.5% Monthly payment: $1,264.14 Remaining balance at end of 5-year term: $187,222 Term: 30-year fixed-rate
A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term. For example: The Fannie Mae seven-year balloon mortgage is a type of fixed-rate mortgage with a term of seven years. The principal and interest you pay are amortized over a longer period (30 years) than the actual term of the mortgage. At the end of the balloon period, you may pay off the outstanding balance with a lump-sum payment or exercise the option to refinance for the remaining term.
