QandAs: Loans

What is a Balloon Payment?

Answer:
Balloon mortgages have certain risks. Still,

these loans are an excellent option for homebuyers who want an initial low rate on their home loan. This mortgage can also benefit buyer who plan to move before the balloon payment is due. The average term of a balloon mortgage is five to seven years.

During this time, the homebuyer enjoys a low interest rate, which can result in a lower monthly payment. In this case, balloon mortgages add to home affordability. Not surprisingly, these low rates are short term. Once the five or seven year term ends, the entire mortgage balance is due. Borrower can choose to payoff the loan balance, or refinance the mortgage.

Prior to choosing a balloon mortgage, borrowers should carefully consider the possibility of a higher mortgage rate in the future. Mortgage rates are very unpredictable. Thus, a high 7 percent interest rate can quickly replaced a low 5 percent rate. This decreases affordability for the buyer.

Most borrowers accept a balloon payment with the full intentions of refinancing the mortgage. However, homeowners with a history of late payments may be unable to refinance a balloon mortgage. In truth, some lenders include a clause within the balloon mortgage agreement, which prevents a refinance if the borrower misses a single payment.