Balloon Mortgages | Get a Free Mortgage Quote |
| Balloon mortgages combine features of short-term variable rate mortgages with long-term fixed rate mortgages. The loans provide a level interest rate and payment for an initial term (usually 5 or 7 years), with payments calculated on a 30 year amortization table. However, at the end of the initial period the lender can require that the remaining principal loan balance be paid in full. Sometimes balloon loans have features that allow borrowers to convert the mortgage at the end of the initial term to a fixed rate mortgage for the remainder of the 30 years. For example, a 5/25 convertible means that at the end of a 5 year balloon loan term, a mortgage will convert to a 25 year fully amortizing loan based on the current interest rates; at the end of 25 years the loan will be paid in full. Other times, balloon loans may convert to an adjustable rate mortgage (ARM) at the end of the balloon period. | This is a good option if you know that you will only need the mortgage for a given time or you plan to refinance before the initial term is up. Because balloon loans are considered short term mortgages, the interest rates are generally lower than 30 year fixed mortgages. As with fixed rate mortgages, many balloon loans are sold into the secondary market. They are aggregated with other balloon loans with similar characteristics, such as note rate, term etc., and converted into mortgage backed securities and bonds. These securities are purchased by investors that acquire capital market investments, such as corporate bonds, U.S. government securities, etc. Generally, the yields on balloon loans track the maturities of other capital market debt instruments. |
