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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