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What Is A Balloon Rate Mortgage?

By Stacy Williams

A balloon rate mortgage is a type of mortgage that has a very short duration. On average a balloon rate mortgage is only five years long. At the end of the mortgage period, a final payoff of the amount owed is due. Balloon rate loans do not amortize during the loan. The mortgage holder will be required to either refinance the debt to pay off the original mortgage holder or make cash payment. Most balloon rate mortgages have very low interest rates attached to them; however, the large final payment should be a deterrent for borrowers. Most often, this type of transaction is used in commercial properties because ownership changes hands often.

When Is A Balloon Rate Mortgage Good For The Private Borrower?

To use a balloon rate mortgage for a personal residence is risky for the borrower. In the event that you cannot refinance the balance or come up with the pay off amount, you will loose the property. But, this is also a great way to purchase a home quickly and have low rates for five years. If you know that you will be able to refinance the debt at the end of the period you will benefit from the low interest rates on these loans. Also, if you do not intend to remain in the home for more than five years, you should accept this type of loan and when you sell there will be no problem.

Is A Balloon Rate Mortgage Known By Any Other Name?

No. Many times people confuse a balloon rate mortgage with an adjustable rate mortgage. This is wrong. These loans are different in many ways. A balloon rate mortgage requires pay off of the loan in five years. A reversible rate mortgage, after the introductory period, will raise the interest rate on the remaining portion of the mortgage.

Related posts:

1. What Are Balloon Mortgage Loans?
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. Should I shop online for a mortgage interest rate?
5. Can I Lower My Interest Rate On My Mortgage Without Refinancing?