Balloon Mortgages

A Balloon mortgage is short term plan that is based upon a 30-yr amortization loan, and so the monthly payments tend to be very low. However, the actual loan term is usually 5-7 years and does not fully amortize (lessen the principal amount) over the course of the loan. Subsequently, a large payment, usually called the balloon payment, is due at the end of the term.

Who is this plan right for? This type of loan might be useful to a homeowner who is planning on having a large sum of money in order to pay off the loan when it is due, or they are planning on refinancing when the term is up. In fact, some balloon mortgages come with a built-in refinancing option that lets you take advantage of fallen interest rates. Another advantage beside low monthly payments is the ability to qualify for a larger loan. If the homeowner is coming into a large amount of cash, say with an inheritance or retirement, this program might be a viable option.

Hybrid plans: most balloon mortgages are fixed rate plans, but there are other hybrid mortgages called convertibles, which convert to an adjustable rate after a certain amount of time. These are known as 7/23 or 5/25 convertibles. Customers are often warned against these plans because of the inherent risk involved: if refinancing is not an option and you cannot make the payment by the time the loan is due, the lender could put the house into foreclosure.

It is often truly tough to decide whether a mortgage plan would be right for you, but to assist with that decision, use the calculator below.

Be sure to visit our sections on Home Equity Loans and Cash Out Mortgages as well.