Balloon Mortgage Home Loan

A balloon loan has characteristics of both a 30 year fixed rate home loan and an adjustable rate mortgage (ARM).   Like an adjustable rate mortgage, a balloon loan has a fixed rate for a specified period of time.  The most common type of balloon loan has a fixed rate period of 5 or 10 years.  After the balloon loan period, the outstanding loan balance (referred to as the “balloon”) is due in full.

Like a 30 year fixed rate home loan, monthly mortgage payments are fixed in nature and are calculated the same as a fully amortized interest and principal home loan over a 30 year period.  Since the balloon loan term is shorter however, there is a remainder unpaid principal balance.  It’s the loan maturity (when the balloon comes due) that differs from a 30 year fixed rate home loan.

When the balloon loan comes due, most borrowers will be forced to refinance (provided they don’t have the capital to pay the outstanding principal balance in full) or sell the home.  Balloon loans became very popular in the mid 2000’s as smaller second mortgages or “piggybacks” (vs. a first mortgage).  This was done so the borrower could avoid paying private mortgage insurance (PMI) on the first mortgage.

A balloon loan typically has a lower interest rate because the length of time for repayment of the loan is shorter and the lender therefore has less default risk.  A balloon loan is also quite simple to understand and straightforward.  For these reasons, if a borrower plans on being out of the home within the balloon loan expiration period, or expects a large financial windfall at the end of the term, a balloon loan can be an excellent option to consider for your home loan financing.

If you’re considering a balloon home loan, use our balloon mortgage home loan calculator to determine your payment schedule.  You’ll be able to amortize your home loan payments over a fixed period of time at a fixed interest rate and plan your finances according to the balloon loan payoff.

It’s important to be highly confident you’ll be out of the house within the balloon loan period or have the capital to repay the balloon, as you’ll be required to refinance the loan principal balance at potentially higher (or possibly lower) interest rates when the balloon loan comes due.