Balloon Mortgages
Balloon loans are short term mortgages that have
some features of a fixed rate mortgage. The loans provide a level payment
feature during the term of the loan, but as opposed to the 30 year fixed
rate mortgage, balloon loans do not fully amortize over the original term.
Balloon loans can have many types of maturities, but most balloons that
are first mortgages have a term of 5 to 7 years.
At the end of the loan term there is still a
remaining principal loan balance and the mortgage company generally requires
that the loan be paid in full, which can be accomplished by refinancing.
Many companies have other options such as a conversion feature at the end
of the term. For example, the loan may convert to a 30 year fixed loan
at the thirty year market rate plus 3/8 of a percentage point. Your conversion
can be guaranteed based on certain criteria such as having made your last
24 payments on time. The balloon mortgage program with the conversion option
is often called a 7/23 Convertible or 5/25 Convertible.
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