What is a balloon payment mortgage?

What is a balloon payment mortgage? Maybe you know it by its other term: a partially amortized loan. Balloon payment mortgage refers to when your liability or obligation is only partially amortized. That means that the rest of the balance is to be paid upon the completion of the term. A balloon payment mortgage is paid off with one large payment at the very end of the loan term.

Who might benefit from a balloon home mortgage? There are many different scenarios in which a balloon home mortgage schedule might actually prove tobe a very helpful thing. For instance, let us say that you plan on buying a new house, but you don't plan on staying on at that house for very long. In this particular scenario, you may be tempted to get a balloon home mortgagebecause it allows you to experience a very low interest rate schedule at thevery beginning of the home loan term. So if you know that you will not be staying very long in one location, you may very well benefit from this type of home mortgage.

Balloon payment mortgages are described in this manner because this type of loan usually sets up for a "balloon" payment at the end of the loan term. In most other kinds of loans, monthly payments work towards paying off the interest. They tend to chip away at the principal amount, which is the original amount that is owed on the balance. Thus, no money is owed at the end of a balloon payment mortgage.

The monthly payment of a balloon payment mortgage only makes up part of the interest. When the balloon payment mortgage term expires, the balance is due in full. Most second mortgages that are taken out tend to be balloon payment mortgages. Why is this the case? Let us look at an example. Let us say that your balloon payment mortgage is $20,000, and let us say that the monthly interest payment is for a ten-year term. When the balloon payment mortgage term comes to an end, you pay for the remaining $20,000 principal amount.

One of the most popular balloon payment mortgage products is the 30-year loan that has to be paid off in five or seven years. The interest rate of the 30-year balloon payment mortgage tends to be lower than a normal 30-year fixed rate mortgage. Most monthly payments of balloon payment mortgage are amortized based on a 30-year loan term. A large amount of the balloon payment mortgage is due at the end of a five or seven year period.  

Here is a tip for home borrowers. When you do take on a balloon payment mortgage, make certain that the due date is not too early. You might have to foreclose and lose the property if you are not able to pay your balloon mortgage payment on its due date. However, some lenders do offer extensions on their 30-years balloon payment mortgages. You may be able to extend your balloon payment mortgage, but will have to apply for a new interest rate. Most balloon mortgage loans base their new interest rates on a conversion formula. In some cases, you may have to re-qualify for the balloon payment mortgage. Especially if the new interest rate on the mortgage is higher than the old rate.