What is Balloon Mortgage and How Does It Work?
The Balloon mortgage is another type of loan program available to real estate buyers, which has contract features that can be attractive to borrowers, but also dangerous. The combined total of all monthly bills paid on a Balloon loan will not equal the total amount due on the loan by the end of the term, a scenario called Negative Amortization. Because there will still be accrued interest at the end of the loan term, this past due amount is considered “capitalized”, and therefore added to the outstanding principle balance. When a buyer reaches the end of his mortgage loan term, the remaining principle is due immediately and in one lump sum. If the borrower does not have enough cash on hand to cover the amount of the balloon payment, then he must obtain another loan for the balloon amount, or refinance the mortgage to include the balloon payment into the new loan. Balloon mortgages are not uncommon, and they allow borrowers to obtain mortgages with lower monthly payments because of the
