Balloon Payment Mortgages

A balloon payment mortgage is home loan that does not fully amortize over the term of the loan.  The payment on a balloon mortgage loan is calculated over a predetermined period, most commonly for 30 years, but the balance of the loan is due or payable after a specified period before the 30 years.  An example of this is a five year balloon home loan.  This home loan would have principal and interest payments based on a 30 year loan, but the outstanding balance has to be repaid in full before the end of the five year term.  This payment is at the end of the term is how the balloon name was derived.

The most popular balloon mortgages have a fixed rate period of either five or seven years with a thirty-year amortization and generally they will not have a prepayment penalty.  At the end of 7 or 5 years the borrower has usually two options to make the final balloon payment.  The home can be sold to pay off the home loan or the borrower can refinance the home loan.  Either option can be exercised up to the time the term of the home loan ends. 

There is another type of balloon option to handle the remaining balance at the end of the term.  This option is found in some balloon payment mortgages and has an option to extend the home loan for the remaining term at the prevailing market rates adjusted according to terms in the original mortgage note.  The rate then remains fixed for the rest of the home loan term.  This feature is referred to a convertible option, since you may convert the mortgage loan to a fixed rate at that time.  The home loan may also be referred to as a two-step, the first step is the balloon term and the second step is the conversion.  The general conditions to be able to convert include; the home is still your primary residence, you have a good payment history and your payment is current and there are no additional liens on the property.

The interest rates on balloon payment mortgages are generally lower than that of a 30 year fixed rate mortgage loans.  The major advantages of the balloon payment mortgage are; lower interest rates, lower payments and the ability to qualify to buy a larger home.  Generally these mortgage loans are considered when the borrower does not expect to be in the home at the end of the fixed mortgage loan term.  Of course there are some disadvantages to the balloon mortgage, most notably, continually worrying about the end of the fixed rate period when the large balloon mortgage payment will be due.

The balloon payment mortgage is clearly not for everyone to consider.  When interest rates and mortgage rates are low from the short term to the long term, the slight benefit of a balloon with a lower mortgage rate is eroded.  Most home buyers however, do not have the same mortgage five or seven years later, they have since moved and paid off or did a mortgage refinance.  Weighing the benefits and risks of the features on these mortgage loans against your needs will determine if the mortgage rate and costs of this product should be considered further.

Always investigate the differences in mortgage rates between the balloon mortgage loan and a standard fully amortizing home loan.  These homes can be used for both a home purchase as well as a mortgage refinance.  Use a mortgage calculator to help compare the mortgage rates, mortgage payments and the amortization schedule on the loan including the balloon payment can be very useful to determine if this type of home loan is right for you.