A balloon mortgage leaves a bulk balance due at the time of maturity and is not fully amortized during the loan period. The large final payment that is made at the time of maturity is called balloon payment and hence the name of the mortgage. More than the residential real estate, the balloon mortgages are used for commercial real estates. Generally floating or fixed interest rates are used in balloon payment mortgages.
In other words it can also be said that a balloon mortgage performs like fixed rate mortgage but for a much lesser time period and with monthly payments that are lower in amount. But unlike the fixed rate mortgage, the balloon mortgage asks the borrowers to pay a huge ‘balloon payment’ at the loan’s end term.
The concept of balloon mortgage has both the advantages and disadvantages. The disciplined borrowers can have the advantage of balloon mortgage. For example, when the borrowers wish to sell his or her home before the due date of balloon payment, this type of loan helps the borrowers to get more home for their money as the payments made on every month basis are actually less than any fixed-rate mortgage.
For those borrowers who cannot afford the huge balloon payment at the end of loan period can find themselves into trouble. Especially those borrowers who need to refinance the balloon payment through the original lender can face some problem.
It has been often seen that the borrowers do not have the resources to make the large balloon payment at the end of balloon mortgage loan term. For the convenience of such borrowers, a ‘two-step’ mortgage plan can also be applied with the balloon mortgages. This two step plan is also known as the ‘reset option’. Under this practice, the mortgage is reset in a schedule of fully-amortizing payment process. The current market rate is also used for the purpose. The two-step option for the balloon mortgage is not automatic and can be availed only by those borrowers who are still the owner or occupant and are not having 30-day late payments in last 12 months and also those who don’t have any other lien against the property.
Last Updated on : 1st July 2013