Balloon Mortgage

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Mortgage Dictionary -> Balloon Mortgage

There are many different types of mortgages, but perhaps the one that is most confusing to the average home or business owner is the balloon mortgage. Many people think that it is a mortgage similar to an adjustable rate mortgage, but instead, it's a completely different type of mortgage. In this article, you will be learning what the balloon mortgage is.

What is a Balloon Mortgage?

Contrary to what some may think, the balloon mortgage is a mortgage in which there is a balance left over at the end of the mortgage. With most mortgages, when the loan matures, the loan is completely paid off and the home's lien transfers from the lender to the homeowner. However, in a balloon mortgage, there is still a considerable amount of money left on the loan when it matures, usually after 5 to 7 years.

An Example

So how exactly does a balloon mortgage work? Well, let's say the homeowner has taken out a $100,000 loan to pay for the house. The mortgage is a 7 year mortgage and has a 6% interest rate. Instead of paying the amount necessary to pay the mortgage off in 7 years, the homeowner makes payments similar to that which they would be making if in a 30 year mortgage (so around $600 a month). At the end of the 7 year mortgage, there is a balance of roughly $88,000. At this time, the homeowner may either pay the $88,000 or refinance the mortgage.

Balloon Mortgage Payment

The balloon mortgage payment is simply the remainder of the loan that must be paid off when the loan matures. Depending on the value of the loan and the length of the loan, the balloon mortgage payment may be several thousand dollars or as much as $90,000.

Why People Choose Balloon Mortgages

There are two main reasons why a homeowner may choose a balloon mortgage. The first is that the payments are typically very cheap in comparison to what they might get with a traditional mortgage. The second reason is that a balloon mortgage, due to the risk of potentially losing the house after the loan matures, is easier for those with poor credit to obtain than a traditional mortgage would be.