 Sam
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 Posted: Thu Apr 01, 2004 3:28 am Post subject: Balloon Mortgage |
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A Balloon Mortgage is a short term fixed rate mortgage which involves low monthly payments for a specified time period, with the total balance to be paid at the end of the loan term. The large sum payable at the end of the loan term is called balloon payment.
Features:
- It has a shorter loan term of about 5 or 7 years. Hence the annual percentage rate is lower than that of other conventional mortgages.
- A balloon mortgage requires low interest and monthly payments during the fixed period.
- The monthly payments are calculated using a 30 year period although the actual loan term is shorter. At the end of the loan term, the borrower should pay off the unpaid balance in a single payment.
- Balloon mortgages can be easily converted to long term fixed rate mortgage after the loan term is over. In this case the interest rate of the mortgage will change only once, to the prevailing rate of a fixed rate mortgage. But it remains constant till the end of the loan term.
- A borrower can refinance the balloon mortgage, that is, replace it with a new mortgage, if he does not sell the property to pay off the unpaid principal balance.
A balloon mortgage is suitable for those who can pay off a lump-sum amount in a single payment. Otherwise borrowers will have to bear the closing costs for refinancing the mortgage.
For example, Suppose Larson takes a mortgage of $100,000 for 2 years at 6% interest rate. If she pays $3000 as monthly payment for 2 years, then the total payment at the end of term will be $72000. In this balloon mortgage, she will have to pay loan balance at the end of 2 years in a single payment.
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