What is a Balloon Mortgage? Is It Right For You?

While potentially risky, a balloon mortgage is a short-term loan that offers reduced initial monthly payments - and typically a lower interest rate - than many traditional fixed-rate mortgage products.
The name is derived from the way the loan is set up: at the end of the term, your monthly payment “balloons” to include payment of the outstanding principal.

Basic features of a balloon mortgage
Most balloon mortgages have a term of either five or seven years, but are amortized over 30 years. This means the amount of your monthly payment is based upon a schedule that would require you to make continuous monthly payments for 30 years in order to pay off this type of bad credit home loan.

However, because the term of the loan is so much shorter than this, you’re left owing an outstanding balance. Usually, this amount must be paid off through mortgage refinancing or the selling of your residence. For example:

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Potential risk of a balloon mortgage
Because a balloon mortgage does very little to pay down your principal, it’s not an effective way to build equity in your home. It also may not be the best solution if you plan to stay in your home and refinance to a traditional mortgage at the end of its term, as this will likely result in a sudden increase in your monthly payments.

Also, be wary: If you’re unable to afford the higher payments, you may be forced to sell your home or risk foreclosure.

Balloon/reset mortgages
Some balloon mortgages also offer a conversion/reset option that enables you to extend the term of the mortgage at the current home mortgage rate. This may, however, involve re-qualifying if interest rates have risen substantially since you first took out the loan.

Speak with our brokers to learn more today and determine whether or not this option is right for you.