A mortgage that is paid in full after a period of years that is shorter than the term of the loan. For Instance, A ten year balloon loan would have its payments calculated over a 20-30 year period, however, the full balance of the loan would have to be paid in ten years. This is often referred to as a 30 due in 10, 30 due in 15 (15 year balloon), etc.Second mortgages often are balloon mortgages in order to keep the payments down for the borrower. A 15 year mortgage will have a higher payment than a 15 year balloon mortgage.
Most often the borrower will plan to refinance in a certain period of time to pay off the note before it becomes due.
A balloon mortgage is a good way to keep you payments low, keeping in mind that there will be a large payment(balloon) due at the end of the balloon term.
The alternative to a balloon would be to get an Adjustable Rate Mortgage (ARM). An ARM will adjust after the fixed period while the balloon needs to be paid in full or refinanced. We will discuss what is right for you.
Most income producing properties are financed with Balloon Mortgages. Investors prefer the lower monthly payments that come with Balloon Mortgages. Everything else being equal, an investment with a constant cash inflow is always better than one that requires capital injection.
Some Balloon Mortgages have an "extendible" feature. Balloons with such feature gives the mortgagor the option to renew, or extend, the mortgage when the balance becomes due, provided that certain conditions are met. The extendible feature can save the mortgagor thousands of dollars in refinance costs. An example of an extendible Balloon Mortgage commonly utilized to finance small commercial properties and multi-unit apartments is the 5-5-5-5-5, in which the payment is amortized over 25 years, but is due in 5 years, with the option to renew the loan at the end of each 5 year period.
In addition to a conventional second mortgage, Home Equity Lines of Credit often have a balloon feature. These HELOCs usually have a draw period, then a repayment period and then a balloon if the line is not pais off by the end of the repayment period.
A big problem with a balloon loan, is the person needs to be very disciplined in financial planning for the large single payment. Balloon loans are commonly used when refinancing or when a big cash event is coming up.
