A balloon mortgage does not fully pay off over its term. You make payments for a set period, often five or seven years, and the remaining balance is due in one lump sum at the end.
How it works
Payments during the term may be calculated as if the loan were a 30-year mortgage, so they are lower than a loan that fully amortizes over the same period. At maturity the balance must be paid off, refinanced, or, on some loans, converted to a new term under conditions set by the lender.
Who considers one
- Borrowers who plan to sell before the balloon date.
- Borrowers who expect a specific event, such as the sale of another property, to pay off the balance.
The risks are real
- If rates are higher when the balloon comes due, refinancing into a new loan will cost more.
- Refinancing is never guaranteed. A change in income, credit or home value could make it difficult or impossible, and the balance is still due.
- Balloon loans are not "qualified mortgages" under federal rules and are offered by a limited number of lenders. We will tell you plainly whether one fits your situation or whether a fixed-rate or ARM option is safer.