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What Are Balloon Mortgage Loans?

By Eric Goodwill

A balloon payment mortgage is a home loan which is not completely amortized. Throughout the term of the loan a balloon mortgage has fixed low payments, leaving the majority of the balance owed at maturity.

Common in Commercial Real Estate

Balloon payment mortgages are more frequent and mostly used in commercial real estate financing and are much less widespread in residential real estate. Balloon payment mortgages are loans that are usually short term mortgages that have a few elements of a fixed rate mortgages. Balloon loans do not fully amortize. Instead they offer consistent monthly payments which are great for anyone concerned over cash flows. This is why this type of loan is most common in the commercial business real estate.

Terms and Conditions

Balloon loans can have a lot of different types of maturities. However, nearly all first mortgages balloons have a term range of 5 to 7 years. Moreover, balloon payment mortgages may have a fixed or a floating interest rate, depending on the agreement. This is another reason why this type of loan is mostly used in the commercial real estate financing. It allows for low monthly payments which helps businesses with cash flow.

Payment Due at Maturity

At the end of the term, for a balloon loan, there is still the matter of the remaining principal loan balance. The lending institution usually requires that the loan balance, or balloon amount, be paid in full. This can be accomplished by refinancing. A lot of lenders include additional options such as a conversion feature at the end of the term. For instance, a balloon mortgage at maturity can be converted to a 30 year fixed loan. Of course this type of option comes with predetermined costs.

Related posts:

1. What Is A Balloon Rate Mortgage?
2. What Is The Difference Between An ARM And A Balloon Rate Mortgage?
3. Is There Such A Thing As A 5 Year Fixed Rate Mortgage?
4. How Do I Find The Best Commercial Mortgage Rate?
5. Are There Mortgage Loans That Do Not Require A Credit Check?