BALLOON MORTGAGE

A balloon mortgage is a short-term fixed-rate loan which features small payments for a certain period of time and one large payment for the remaining amount of the principal (balloon payment), paid at the time of the final installment. With a balloon mortgage, the payment is the amount required to pay off the mortgage in full over 30 years but after a fixed period of time (from 5 to 15 years) the loan has to be paid in full. When the loan matures, you must pay the loan off in cash (Balloon Payment) or refinance. The advantage of this type of loan is that the initial rate is usually lower than a normal fixed rate loan. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.

For example, on a $100,000 loan at 6%, the payment on a 7 year balloon whose payment is spread out over a 30 year period is $599.56. Since you are only paying on the loan for 7 years, the balance of $89,638 has to be repaid in full after that 7 years is up. If the borrower is still in the house and can't pay the loan off in cash, the balloon loan must be refinanced.