Balloon Mortgage

A balloon mortgage is one in which monthly payments are made for a specified period of time, with the balance of the loan paid in full at the end of the loan term. Like an Adjustable Rate Mortgage, interest rates on a balloon mortgage are typically lower than on a fixed rate mortgage. A mortgage loan requires the remaining principal balance be paid at a specific point in time.

Balloon Mortgages can be an excellent choice if you are looking for a lower interest rate and believe that you will be in a home for a defined period. Balloon mortgages are generally available with fixed periods of either 5, 7 or 10years. They are frequently described as a 5/25 or 7/23. At the end of the term, a lump sum payment of the outstanding balance is due or you must refinance the loan. What sets them apart from an ARM (adjustable rate mortgage) is that after their fixed period, your interest rate will change only once while an ARM will continue to adjust on either a semi annual or annual basis. At the rate change, your rate generally will change to the prevailing 30 year fixed rate available at the time. Balloon mortgages are available up to the conforming limit which is currently $322,500.

Advantages: The main advantage is the lower initial monthly payment & Lower payment over a shorter period of time. Lower monthly payment allows you to apply more principal towards other liabilities. You may qualify qualify for higher loan amounts. Many balloon mortgages offer the option to convert to a new loan after the initial term. You can take advantage of lower interest rate and accelerate your equity position by making extra principal payments.

Disadvantages: The major disadvantages is the risk of rates being higher at the end of the initial fixed period & risk of foreclosure if you cannot make balloon payment, refinance or exercise the conversion option.