A balloon mortgage is a loan program that has a longer amortization period than its term. This would result in a large balloon payment due at some point of time.
1) 15 Year Balloon Mortgage
This is a loan program in which the payments are calculated as if it was a 30-Year fixed rate mortgage but the note is only for a 15 years. This would result in the 180th payment (the end of first 15 years) being for the entire outstanding balance.
2) 5 Year Balloon Mortgage
This loan program is a form of a 2-Step Loan program. The rate is usually lower than the typical 2-Step Program because the bank has an out if the borrower makes any late payments. In a 5 Year Balloon program the interest rate would remain fixed for 5 years with the payments amortized over 30 years. At the end of 5 years the loan becomes due, this is referred to as a balloon payment. Typically if a borrower has not made any payments over 30 days late they will have a one time conversion option of fixing the rate for another 25 years (using current rates at the time of conversion). This type of program is usually offered in 3,5, and 7 year terms.
THE BENFITS OF A BALLOON MORTGAGE
* Low Initial Rate
* Typically lower than a 2 Step program due to balloon payment.
* Allows for a 30 year program with only one change
THE DETRACTORS OF A BALLOON MORTGAGE
* Balloon payment due at some point
* No Conversion Option if the borrower has made a 30 day late mortgage payment in the most recent 12 months forcing borrowers to refinance.
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