A mortgage which does not fully amortize over the term of the loan and leaving a balance due at the time maturity is known as balloon mortgage. The balloon mortgage common in commercial real estate than residential real estate. The final balance which is due at maturity called as balloon payment. However the amount of balloon payment must be stated in the contract. In many cases, balloon mortgages mature between five to ten years after the origination date of loan.
In simple understanding, the balloon mortgage involves payment of lump sum amount at the end of maturity of the specific loan. For example, if a borrower has a taken loan of $100,000 for five year term with 5% percent interest rate. In this case, the monthly payment would be $536.82. The balance amount i.e. $92,366 would be balloon payment and need to be paid be at the end of the five year maturity period. In order to pay such huge amount, the balloon mortgage is chosen by borrowers as it offers favorable rates with lower monthly payments. Such lower rate monthly payments also help to borrow to qualify for larger loan
When the borrower took mortgage loan, the borrower supposed to pay regular payments on the loan till maturity of the loan. At the end of the loan, the borrower has to pay a larger amount which is a balloon payment. As such, many borrowers option to avoid the balloon payment and hence desire to choose balloon mortgage. However, if the borrowers have sufficient funds, they can pay balloon payment and avoid balloon mortgage.
The rate of balloon mortgage may vary depending upon the credit score of the borrower. It means if the borrower been delinquent payment track may not be able to replace the balloon mortgage. Replacement is not an option and instead, refinance is the loan is required. When the loan becomes due, the owner able to sell or refinance the home to avoid the large balloon payment. Such refinance is possible only when the borrower’s credit history is good.
When the balloon or lump sum payment is due and the borrower is not interested to pay such balloon amount, the borrower can go refinance through balloon mortgage at prevailing rates. If the borrower unable to refinance the balloon mortgage, the borrower forced to sell the property or must pay the balloon payment. The monthly payments in balloon mortgage will be lower than other mortgage types.