A Balloon loan is a short-term mortgage that has almost similar features of a fixed rate mortgage. The loans provide a constant payment feature during the specific term of the loan, but as compare to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Interest rate and payment stays the same until the loan is due. Characteristically, the entire loan amount is due in either 3, 5, or 7 years.
Remaining loan amount at the end of the loan term is required to be paid in full by the mortgage companies, which can be accomplished by refinancing the loan. However, many lenders provide other options such as a conversion feature at the end of the term. For instant, in some cases, the loan may convert to a 30 year fixed loan at the thirty-year market rate plus 3/8 of a percentage point. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.
Balloon type loan programs are usually recommended for borrowers who are certain that they will be leaving their current house in 3, 5, or 7 years, or going to refinance the loan.
- One of the advantages of balloon loan programs is that they tend to have the lowest interest rate and therefore lowest mortgage payment for the balloon period.
- Lower initial monthly payments with option to refinance at the end of the term period.
- Many balloon mortgages offer the option to convert to a new loan after the initial term.
- The entire balance must be paid off or refinanced at the end of the term.
- Always a risk of higher Interest rate if loan is refinance after balloon period.
- Risk of foreclosure if you cannot make balloon payment, if you cannot refinance, or if you cannot exercise the conversion option.