Balloon
Mortgages
Balloon
loans are short term mortgages that have some features of a fixed rate mortgage.
The loans provide a level payment feature during the term of the loan, but as
opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize
over the original term. Balloon loans can have many types of maturities, but most
balloons that are first mortgages have a term of 5 to 7 years.
At
the end of the loan term there is still a remaining principal loan balance and
the mortgage company generally requires that the loan be paid in full, which can
be accomplished by refinancing. Many companies have other options such as a conversion
feature at the end of the term. For example, the loan may convert to a 30 year
fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your
conversion can be guaranteed based on certain criteria such as having made your
last 24 payments on time. The balloon mortgage program with the conversion option
is often called a 7/23 Convertible or 5/25 Convertible.