Balloon Mortgage Loan

Balloon Mortgage is a loan where the amortization period is longer than the loan term. In a balloon mortgage the monthly payments will not cover the entire principal and interest and there will be a lump-sum amount due at the end of the loan term. The lump-sum amount due at the end of the balloon mortgage is known as balloon payment. Balloon mortgages are commonly used as a second lien residential mortgage.

At the end of the loan term, the borrower usually has three options:

- Pay: Pay the large unpaid principal amount. This may not be possible for a number of borrowers.
- Refinance: Refinance the mortgage loan into a new mortgage loan. A lender generally anticipates the borrower to refinancing the loan at the end of the loan term.
- Reset: Approach the lender to continue with the mortgage and convert let the loan fully amortize/pay off.

Source :www.MortgagesAnalyzed.com

Balloon Mortgage Loan can be expressed in two ways:

- Expressed as X Due in Y: The X represents amortization period, which is the number of years during which the loan will be amortized. Y represents the loan term in years. For example, 30 Due in 15 Balloon Loan. It has a 15 year loan term and an amortization period of 30 years.
- Expressed as X/Y: The X represents loan term, which is the number of years before the balloon maturity date. The Y represents the difference between the amortization period and the loan term. The sum of X and Y represents the amortization period, which is total number of years the payments will be based on. For example, 7/23 Balloon Loan. It has 7 year loan term and an amortization period of 23 years. A 30 Due in 15 Balloon Loan would be denoted as 15/15 Balloon Loan.

Source :www.MortgagesAnalyzed.com

Let us take an example of 30 Due in 15 Balloon Mortgage Loan, let’s assume the loan amount is $100,000 and the interest rate is 6%. The monthly payment will be $599.55. At the end of 15 years, the loan is due and the balloon payment due will be $71,048.84.

Source :www.MortgagesAnalyzed.com

- Lower Interest Rate: The balloon mortgage may offer a lower interest rate than other fully amortizing loans or HELOC’s.
- Easier to Qualify: Balloon mortgages are usually easier to qualify than other loans. However, this benefit can easily turn into a trap. If the borrower could not qualify for a 30 year fixed mortgage then taking a balloon loan may not be wise. Commonly, borrowers assume that by the balloon maturity their financial conditions would improve considerably or that the real estate value would increase that would allow them to refinance easily. However, these events may not come out to be true as seen during the financial crisis of 2007. In fact, with rising unemployment, the property prices tend to stagnate and fall.

Source :www.MortgagesAnalyzed.com

- Higher Risk: Refinancing or resetting the balloon loan at the end of the loan term may expose the borrower to higher interest rates that may be prevailing in the market at that time. Another risk may be potential reversals in the financial conditions of the borrower at the time of balloon maturity. The lower financial condition may prevent the borrower from refinancing or resetting. The lender may also demand a higher interest rate.

Source :www.MortgagesAnalyzed.com

- Short Term Occupancy: The loan may be appropriate for borrowers that expect to sell their real estate before the end of the loan term.
- Second Mortgage: A number of borrowers take this loan as a second mortgage loan when their total loan amount is greater than 80% LTV. This is to avoid mortgage insurance. Usually, mortgage insurance is required if the loan amount is greater than 80% of the value of property. By splitting the loan into two the lender may waive the requirement for mortgage insurance. The second lien Balloon Loan would be at a much higher interest rate than the first lien mortgage loan.

Updated: Feb 16, 2014

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Mortgage which does not fully amortize over the loan term and leaves a lump-sum due at maturity

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