A balloon mortgage can be an excellent option for many home buyers. A balloon mortgage is usually rather short, with a term of five to seven years, but the payment is based on a term of 30 years. Balloon mortgages often have a lower interest rate, and can be easier to qualify for than a traditional 30 year fixed mortgage. There is, however, a risk to consider. At the end of your loan term you will need to pay off your outstanding balance. This usually means you must refinance, sell your home or convert the balloon mortgage to a traditional mortgage at the current interest rates.
Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.
At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.
The major benefit of going for a balloon mortgage is a lower interest rate as compared to a fixed rate mortgage over 30 years. Generally balloon mortgages can prove helpful in case you are buying a bigger home. Going for a balloon mortgage is a very good option for those who are sure that they would require the mortgage only for a given period of time or have a plan to refinance before the initial term gets over.
Compared to other mortgage loan types, a balloon mortgage can lead to some complications and hence it becomes inevitable to have well defined documents before entering into a deal. Also choosing the right mortgage vendor and scanning contracts for hidden costs and risk factors, helps.
