Balloon Mortgages

A Balloon Mortgage has a fixed-interest rate and payment, but the term of the payments is only five to seven years. After this time, the entire balance of the loan becomes due.

Balloon Mortgages are typically used as a last resort by people who can not qualify for a fixed or adjustable-rate mortgage. They also are used if you have the assets to pay for a home outright, but want to avoid liquidating them.

Advantages

• Easy to qualify. Since the loan is short term (no more than seven years) the lender is taking less risk, making it easier for you to qualify.
• Provides five to seven years of protection from rate increases.
• Receive a higher loan amount since the loan is a low risk to lenders.

Disadvantages

• You must refinance your mortgage, sell your home, or pay the remaining amount of the loan after five or seven years. This means:
  1. If you refinance your mortgage and the interest rates have gone up, you will have a higher interest rate.
  2. If you sell your home and the housing market is soft, you may not be able to get enough out of the sale to pay off loan.

Common Balloon Mortgages

5-Year Balloon: A loan with a fixed interest rate and monthly payment for five years. After that, the balance of the loan becomes due in one "balloon" payment.

7-Year Balloon: A loan with a fixed interest rate and monthly payment for seven years. After that, the balance of the loan becomes due in one "balloon" payment.