What are 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.
Interest Payments only with Balloon Mortgages
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.
Balloon Mortgages: Commercial Loans
Balloon mortgages are very common with commercial loans. Commercial loans are not regulated by RESPA and a mortgage broker does not need to have a mortgage loan originator license to be a commercial broker. Most commercial loans are adjustable rate mortgages and most of them have a balloon payment due after a certain amount of years after the first adjustment periods ends. If you cannot get another mortgage to refinance the current balloon mortgage, you can be in trouble if your current balloon mortgage is not willing to work with you. Always have an attorney read over a balloon mortgage before committing to ne.