A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.These can be ideal if you think you will be selling or refinancing your home in five to seven years and want a low monthly payment during that time. It would be prudent to make sure that you ask your loan officer that you will be able to refinance either before or at the time the balloon is due, and what conditions may apply. If you have concerns about meeting the refinance conditions or if you think the balloon term will be due prior to you being ready to refinance or move, then the balloon mortgage may not be your best option.
Balloon mortgages are most popular with 2nd mortgage notes, such as a 30 year amortized note due in 15 years (30/15). With the creation of the 40 year mortgage recently, 40 year notes due in 30 years has surfaced as a viable option for home owners on 1st mortgages.
The nice thing about balloon mortgages is that the large balloon payment due at the end of the loan's term can either paid OR if you prefer not pay it, the balloon payment can be refinanced at that time into a very low monthly payment. This enables a savvy buyer to pay very low monthly payments for the term of the original loan and potentially even lower monthly payments after refinancing the balloon at the end.
Most commercial properties are financed with Balloon loans. Since Balloon loans are amortized over a longer period than they are due, they require lower monthly payments than their fully amortization counterparts. For income producing commercial property owners, loan programs with low monthly payments are most preferred.
Balloon mortgages are expressed in numerical terms such as a 30 due in 15 or a 20 due in 5, etc. The first number refers to the length of the amortization schedule and the "due in" refers to when the balloon balance becomes due.
A mortgage loan that mandates the outstanding principal balance be paid at a certain point in time. For example, a loan can be amortized as if it would be paid over 30 years, but it actually must be paid at the end of the tenth year.
Remember that lending criteria can change over time so that, in 7 years or whenever the balloon might be due, the criteria for refinancing might be more stringent, thereby making it more difficult for you to do the refi. Lenders offer lower rates for balloon loans because their risk is lower. Essentially, some of the risk is being transferred to you, the borrower in return for that lower rate.
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