What are Balloon Mortgages?

Balloon mortgages are designed for borrowers who have the ability to make a large payment, usually at the end of the loan period. Balloon payments require that borrowers carefully manage their resources to ensure that they are able to pay the large balloon payment when due. The advantage of a balloon mortgage is that the money that is not required for the loan up until the balloon payment and the can be invested in a side account with a higher rate of return. The negative of a balloon mortgage is that if a person does not have sufficient funds to pay off the loan, the collateral can be foreclosed. Most borrowers with balloon notes refinance once the balloon term is near.

A balloon mortgage works like a regular mortgage. For example, a borrower takes out a 15-year balloon mortgage of $100,000. Assuming 0 percent interest, the annual payments are approximately $6,667. If this loan were structured as a balloon mortgage, it could have a balloon payment of $25,000 in year 15, thus lowering the annual payments between years 1 and 14 to $5,357 a month. That would be a difference of $1,310 per month during years 1 to 14 of the loan. The monthly payment reduction can benefit a borrower tremendously.