A balloon mortgage, or balloon payment mortgage, is a short-term loan, usually ten years or less, but the monthly payment is calculated as if the loan extended over thirty years. This leaves a large balance -- the remaining 20+ years of payments -- due at the end of the term.
The balloon mortgage is a risky proposition that should not be entered into lightly. However, it can be an excellent choice for some buyers, especially in growing markets where home values are increasing steadily.
It is also useful for people who "flip" real estate regularly by buying a home, investing the monthly savings in improving the property, and then selling again within a few years.
- Lower interest rate
- Low monthly payments
- Easier to qualify for
- Excellent choice if the house will be sold again within a few years
The average homeowner usually does not have the means to pay off the balloon payment directly, so they must:
- Convert to a traditional mortgage
- Refinance into a new loan
- Sell the home
If the value of the house has not increased during the term of the balloon mortgage, all three options may be problematic. This may leave the homeowner in a very difficult situation, either forcing them into a high-interest loan with unfavorable terms, or leaving them with an immense debt that can seriously injure their credit score, or even lead to bankruptcy.