A balloon mortgage is a short-term, fixed rate mortgage loan which does not fully amortize over the term of the note. The balloon mortgage usually has a lower rate; however, that lower rate does not last forever.
The balloon mortgage rate loan requires a large lump-sum payment at the end of a specified term, usually 5 to 7 years. At the end of the term, the mortgage “balloons” in amount and the principal loan balance is due in full.
Advantages of a Balloon Mortgage Loan:
Lower Interest Rate.A balloon mortgage will offer a lower interest rate. A lower interest rate means you may qualify for a larger home with manageable monthly mortgage payments.
Fixed Interest Rate. The interest rate will not adjust or change when interest rates rise on in the market. Once your interest rate is set, it will remain the same.
DownPayment. The down-payment on a balloon mortgage loan is lower than what is normally required.
Conversion Option. Many balloon mortgages offer the option to convert to a new loan after the initial term of 5 to 7 years.
Disadvantages of a Balloon Mortgage Loan:
Outstanding Balance Due. At the end of your mortgage loan term, usually 5 or 7 years, the principal loan balance is due in full.
Sell the Property. If you are unable to refinance or convert the loan you may be forced to sell the property.
Little to No Equity in Home. A balloon mortgage loan does not pay down the principal of the loan therefore; little to no equity is built in the home.
Risk of Foreclosure. A risk of foreclosure is eminent if you cannot afford the balloon payment, cannot refinance the loan or exercise a conversion option.