Balloon Mortgage is a mortgage loan with a relatively short-term and fixed monthly payments for a specific period, followed by a large lump sum payment (balloon payment) at the end.
A balloon mortgage is a type of mortgage loan that features a short-term repayment schedule with fixed monthly payments for a specific period, typically ranging from 5 to 7 years. At the end of this period, the remaining balance on the loan becomes due in a single large payment, known as the balloon payment.
The fixed monthly payments during the initial term are usually calculated based on a longer amortization period, such as 15 or 30 years. This means that the payments are lower compared to a traditional fixed-rate mortgage with the same loan amount. However, since the remaining balance is due as a lump sum at the end of the term, borrowers must be prepared to make a substantial payment or refinance the loan.
Balloon mortgages can be attractive to borrowers who plan to sell the property or refinance before the balloon payment comes due. These loans are often used by individuals who anticipate a significant increase in their income or plan to sell the property within the initial term of the loan.
It’s important to note that balloon mortgages carry some level of risk. If borrowers are unable to make the balloon payment or refinance the loan, they may face financial difficulties and potential foreclosure. Therefore, it’s crucial to carefully consider your financial situation and repayment options before opting for a balloon mortgage.