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Written by Tamara Schmitt
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Wednesday, 02 November 2005 |
Balloon mortgages have a note rate that is fixed for an initial period of time, and then the remaining principal balance is due at the end of the term. When the final balloon payment is due at the end of the term, the borrower can either refinance into another mortgage or pay off the balance.
The balloon loans do not have any penalties for paying off the loan earlier than it is due. You would be able to refinance the loan at any time during the term. The two different terms a balloon loan can have are typically 5 or 7 years. For example if you had a 7 year balloon mortgage with an interest rate of 7.5%, your rate would remain constant for the full term and at the end of 7 years, the remaining principal balance would become due.
5/25, 7/23 Balloon Programs
A balloon mortgage loan is a type of mortgage loan that has a short term (typically 5 or 7 years), but the monthly payment is computed using a 30 year term. When a borrower uses a balloon loan, he/she will make the monthly payment for the scheduled loan term (5 or 7 years). When this loan term is over, the borrower is required to pay off the remaining balance in one lump-sum payment. If the borrower decides not to sell the property after the loan term is over, the borrower has the option to refinance the mortgage with a new one. A 7/23 balloon mortgage gives the borrower the option to convert to a fixed rate program (for a nominal fee) after the initial term (7 years) is over. If the conversion feature is used, the interest rate for the remaining term of the loan (23 years) will be adjusted once to reflect market conditions, then remain fixed for the remainder of the loan term.
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Last Updated ( Wednesday, 23 August 2006 )
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