A balloon mortgage is a type of home loan that features low or no monthly payments initially, often with interest-only payments, but requires the borrower to pay off the remaining loan balance in one large lump sum-called a balloon payment-at the end of a short-term period, typically five to seven years
. Key characteristics include:
- The monthly payments during the loan term are usually lower than a traditional mortgage because they do not fully amortize the loan principal.
- At the end of the term, the borrower must pay the remaining principal balance in full.
- Borrowers often plan to refinance, sell the property, or pay off the lump sum when the balloon payment is due.
- Balloon mortgages can have fixed or variable interest rates and may be structured with interest-only payments or some principal repayment during the term
Pros of balloon mortgages include lower monthly payments and suitability for borrowers who plan to stay in the home short-term or expect to refinance before the balloon payment is due. However, they carry risks such as the need to make a large payment at once, potential difficulty refinancing, and the possibility of foreclosure if the balloon payment cannot be made
. In summary, a balloon mortgage allows for lower initial payments but requires a significant lump-sum payment at the end of the loan term to fully repay the debt
