The other term for a balloon payment mortgage is a partially amortized loan.
Balloon payment mortgage is when your liability or obligation is only partially amortized, leaving the rest to be paid upon the completion of the term.
Because the initial interest rates and monthly payments are lower, a balloon payment mortgage is paid off with one large payment at the end of the loan term.
Balloon payment mortgages are called such because borrowers who are on this type of loan are usually set up for a “balloon” payment at the end of their loan term.
In most other loans, monthly payments do not only pay off the interest but also chip away at the principal amount – the original amount owed. Thus at the end of each loan term where balloon payment mortgage is applied, no money is owed.
With balloon payment mortgages however, the monthly payment only comprises of interest or a combination of interest plus a small amount for the principal.
No matter the case, when the balloon payment mortgage term expires, the balance is due in full.
Most second mortgages are commonly balloon payment mortgages. For instance, your balloon payment mortgage is $20,000 with a monthly interest-only payment set up for ten years.
When your balloon payment mortgage term ends, you still have to pay for the $20,000 principal amount.
There are a couple of accepted institutional loan products that have balloon payment mortgages. One of these balloon payment mortgage products is the 30-year loan that has to be paid off in five or seven years.
Usually, the interest rate of the 30-year balloon payment mortgage is lower than a normal 30-year fixed rate mortgage with due date of 30 years.
Monthly payments of balloon payment mortgage are still amortized based on the 30-year term. But at the end of five or seven years, a large amount of the balloon payment mortgage is due.
To explain further on this, let’s say you have a balloon payment mortgage with an interest rate of 7.5%. After seven years, an approximate 92% of the original balloon payment mortgage amount is due. For example, the amount of the balloon payment mortgage is $200,000.
The interest rate for this balloon payment mortgage is 7.5%. After seven years, the total amount of money you owe to the balloon payment mortgage lender is $184,000, provided that you haven’t sold the property yet or refinanced.
A tip for home borrowers is that when you do take on a balloon payment mortgage makes sure that the due date is not too soon. With balloon payment mortgages, if you can’t pay the lender the amount on the due date, you might have to foreclose and lose the property.
Some lenders offer extensions for their 30-years-due-in-7 balloon payment mortgages.
Lenders of this type of loan may extend your balloon payment mortgage for another 23 years but with a new interest rate. These balloon payment lenders base their new interest rates on a conversion formula.
In this case, you might have to re-qualify for the balloon payment mortgage should the new interest rate on the mortgage being converted is significantly higher than the old rate.