Although many would contend that balloon mortgages are a thing of the past, balloon mortgages are still a creative way to structure a mortgage loan in today's marketplace. Balloon mortgages are not for everyone, thus it is important to understand how they work before jumping into this particular financing scenario. The word balloon refers to the balance that exists and must be repaid at the end of a term.

Let's examine a five year balloon mortgage to gain a better understanding of how a balloon mortgage operates. With a five year balloon, the borrower's loan payments each month can be calculated in the same manner that a thirty year fixed rate mortgage is calculated in terms of monthly payments. Accordingly, after the borrower has made payments for five years on the note, the remaining balance is then calculated and the balance will be due in one lump sum. The most common outcome at the end of the five year term is that the borrower will repay the balance by securing a new loan. The alternative is to pay off the balance all together without obtaining a new loan. For those borrowers who intend to remain in their homes for less than a seven year period, a balloon mortgage may be a viable alternative to the fifteen and thirty year fixed rate mortgages.

There are certain advantages and disadvantages that accompany a balloon mortgage. One advantage of the balloon mortgage is that the borrower is required to pay a lower a payment over a shorter period of time. Additionally, with a balloon mortgage, the monthly payment is initially lower. Finally, balloon mortgages allow the borrower to convert to a new loan once the initial term expires. There are however certain disadvantages to a balloon mortgage. For example, once the initial term expires, borrowers run the risk of paying a higher interest rate when converting to a new loan. For more details on balloon mortgages, and determining whether a balloon mortgage is appropriate for you, contact one of our mortgage loan officers today.