A short term (typically 5-7 years) mortgage that provides a level payment feature during the term of the loan, but as opposed to a 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. At the end of the loan term, the remaining principal loan balance must be paid in full, which can be accomplished by refinancing.
Traditionally, balloon mortgages are used for commercial property. The property owner either refinances or sells the property to satisfy the balloon payment. The commercial property market withstands frequent sales and refinances without over-inflating property prices.
The residential real estate market can also use balloon mortgages. Creative loan officers use balloon mortgage loans as second mortgages for qualified buyers of larger homes. Many loan programs have caps on the amount a borrower can borrow.
In cases where the home price exceeds the primary mortgage amount, home buyers finance the remainder into a second balloon mortgage. When the balloon payment becomes due, the home’s principle loan amounts are rolled into one conventional loan. This is possible if the balloon mortgage loan includes a fairly low interest rate.
Balloon mortgages vary for great appeal to different property buyers. A balloon mortgage loan offers borrowers’ years of flat payments, potentially bring down principle at a higher rate than a traditional 30-year loan. At the end of the balloon mortgage term, usally 5-7 years, the remaining balance is due in one large balloon payment.
Balloon mortgages offer both fixed interest and variable interest rates. Borrowers do not pay the interest over the life of the loan, called amortization, unless the balloon mortgage extends into a 30-year conventional loan. This is an important contract detail– home buyers need to know if there is an automatic refinance option, similar to an ARM, or if other arrangements are needed for the full balloon payment.
A balloon mortgage might not be right for everyone. Talk to your loan officer to see if a balloon mortgage is right for you. Apply online for a balloon mortgage from Meridian Mortgage Solutions.
For more information on balloon mortgage, call Meridian Mortgage at 317-968-9500 or contact us online.
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Endeavor Capital, LLC and its DBA's are not acting on behalf of or at the direction of HUD/FA or the Federal government.
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