With a balloon mortgage, you make monthly payments over the mortgage term, which is typically five, seven, or ten years, and a final installment, or balloon payment, that is significantly larger than the usual monthly payments.
In some cases, you pay only interest on the loan during the mortgage term, and the entire principal is due in the balloon payment.
Many balloon mortgages offer a conversion feature that lets you extend the loan at a new interest rate. For instance, some balloon mortgages convert to a 30-year fixed-rate mortgage at the end of their original term.
You might choose a balloon mortgage if you anticipate being able to refinance at a favorable rate at the end of the term or if you're confident you'll have enough money to pay off the loan in a lump sum. But you may risk losing your home when the balloon payment is due if you can afford to buy the home only because of the comparatively smaller monthly payments that may be available with a balloon mortgage.
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A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date, usually at the end of the term.
a mortgage loan that requires a large payment due upon maturity (for example, at the end of ten years).
- Browse Related Terms: Adjustable-Rate Mortgage (ARM), amortization, balloon mortgage, Convertible ARM, Debarment, Fixed-Rate Mortgage (FRM), Interest-only mortgage, Lock-In, Lock-in agreement, Mortgage life insurance, Negative amortization, Payment Cap, Right of rescission, Self-Amortizing Loans, Swap, term, Weighted Average Life (WAL)
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