A balloon mortgage loan is a short term loan that has some the characteristics of a fixed interest rate mortgage. This mortgage offers a lower monthly payment during the term of the loan; however, unlike a 30 year fixed rate mortgage, these mortgages do not fully amortize at the end of the term. Balloon mortgages loans come in many different varieties, though most balloon mortgages you will finance as a first mortgage have mortgage terms ranging from 5 to 7 years.
At the end of your loan term the remaining principal balance is due.
You will have to pay this balance in full but can do so by refinancing the mortgage. Many lenders offer options such as conversion features at the end of the balloon mortgage term. For instance, the mortgage may convert over to a 15 year fixed interest rate mortgage loan at the fifteen year rate plus a premium percentage charge. The mortgage conversion can be guaranteed based on the lender’s criteria like having an on-time payment record. Lenders often call these balloon mortgage conversion programs a 7/23 Convertible or 5/25 Convertible mortgage loan.
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