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Balloon Mortgage

A modern method of buying a house, that works in a similar way to the popular method of vehicle purchase, known as Personal Contract Plans, is the balloon mortgage. This form of mortgage offers an initial interest rate that is lower than fixed-rate mortgages. It keeps this low fixed mortgage rate for five to seven years and then requires a 'balloon' payment. This payment is the final payment of the loan and pays off the entire balance on the mortgage, which is usually quite high.

Monthly payments for the mortgage are low because the payments for those first five to seven years are paid back at a low interest rate over the total length of the loan. If you plan on either selling your home, paying the mortgage off, or refinancing it before the balloon payment is due, then this type of mortgage is a good deal. Balloon mortgage loans are short term mortgages that have some features of a fixed rate mortgage. The mortgage provides a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon mortgages do not fully redeem the loan over the original term.

Balloon mortgages can have many types of maturities, but most that are first mortgages have a term of 5 to 7 years. At the end of the mortgage term there is still a remaining principal mortgage balance and the mortgage company generally requires that the loan be paid in full, which has to be accomplished by cash or refinancing. Some companies will convert the loan to a normal mortgage of 30 years at the end of the balloon mortgage term, which should be ascertained at the time of taking out the loan.