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A Balloon Mortgage is simply a mortgage that terminates before the principal of the loan is completely paid off. The balloon portion of the term refers to the balance that must be paid on the mortgage at the end of the term.
The annual percentage rate or APR on a balloon mortgage is typically lower than more conventional mortgages such as a fixed rate mortgage or an adjustable rate mortgage. This is because the term on a balloon mortgage is 5 or 7 years. The shorter term of the loan allows the lending institution to better manage the risk of rising interest rates and pass that lower risk on to the borrower.
The lower interest rates found on a balloon mortgage offers an advantage to those homeowners that are certain they will be moving from that home before the term of the balloon has expired. A disadvantage of a balloon mortgage is that if the homeowner decides to keep the property, they will have to find a new mortgage to replace the balloon mortgage that has expired. |
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