Understanding Balloon Mortgages

Balloon mortgages are sometimes referred to as reset mortgages, and offer low interest rates with the balance of the loan due in 5 or 7 years. Balloon mortgages are considered risky, but may be viable options for homeowners who expect to move in the next few years. They may also allow buyers to borrow more money, than a fixed rate mortgage would permit.

Benefits

Based on a 30-year amortization schedule, balloon mortgages mean that those payments are made for only 5 to 7 years, depending on the specific terms of the loan. At that time, the borrower must either pay the balance of the loan in full or reset the loan at the current interest rate. It may also be possible to refinance the balance.

Risks

To reset a balloon mortgage, homeowners must retain residency in the home, have at least a current year long history of on-time payments, and there must not be any liens against the property. If these conditions are not met, there may still be an option to refinance the mortgage. Changes in financial situations, though, can prevent a homeowner from qualifying to either reset or refinance the loan. This would make it necessary to either sell or face foreclosure, in order to meet the balloon mortgage conditions.