What is a balloon mortgage?
A balloon mortgage is a loan that features consistent payment amounts with a large payoff, known as a balloon payment, due at the end of the loan.
In a fixed 15- or 30-year mortgage, a homeowner makes the same payment, monthly or otherwise, through the life of the loan. In balloon mortgages, the monthly payments aren’t enough to satisfy the loan and require the borrower to refinance or pay off the loan or sell the home at the end of the term. Balloon mortgages are usually structured as five or 10-year deals. Although they are rare, balloon mortgages in the U.S. are usually made when the borrower expects his or her income to increase significantly in value over the next few years or when the borrower expects to sell the home quickly.
Lenders get certain legal protections for offering safe and stable loans that most borrowers have the ability to pay. These loans are called “Qualified Mortgages.” Except in certain limited circumstances, balloon mortgages are not qualified mortgages.
Balloon mortgages were once the leading type of mortgage in the U.S, but they are relatively rare today. This is due, in part, to the government’s support for the 30-year, fixed rate loan. Balloon mortgages are typically riskier than traditional mortgages.
Balloon mortgage example
The payments for balloon mortgages are typically calculated as if they were 30-year loans. For a $150,000 loan at 5 percent interest, the monthly payment is about $805 per month. If that loan is structured as a balloon mortgage with a 10-year term, the borrower still pays $805 per month for 10 years. At the end of 10years, the borrower must come up with almost $123,000 to pay off the loan, or refinance it.
Considering a balloon mortgage? Use Bankrate’s balloon mortgage calculator.