What is a Balloon Mortgage?
A balloon mortgage refers to any mortgage that doesn't fully amortize over the loan term. The borrower will make payments over a set period of time which is usually five or seven years. At the end of this term the entire remaining loan balance will be due at once. As you can probably imagine, this final payment can be large, and that's why it is referred to as a "balloon payment."
Balloon Loan Advantages
- Main advantages of balloon loan programs is that they tend to have the lowest interest rate and therefore lowest mortgage payment for the balloon period.
- Good option for people who are expecting their income to rise significantly over the coming years, or borrowers who could potentially have much better credit scores a few years from now.
- Lower initial monthly payments with option to refinance at the end of the term period.
- Many balloon mortgages offer the option to convert to a new loan after the initial term is completed.
Balloon Loan Disadvantages
- Interest rates could rise significantly between now and time the balloon loan comes due thus making your monthly payments much higher after you refinance.
- There is no guarantee that you'll still be a "qualified" homebuyer five or seven years down the road. Your income could potentially drop, or your credit could be worse than it is now. Either of these things could make refinancing tough, expensive, or impossible.
- Finally, property values could plunge between now and then. If the initial term of your balloon mortgage runs out, and your home is worth less than you owe, lenders are likely not going to refinance your mortgage.