Real Estate City Information: Mortgages

Balloon loans

Balloon loans offer lower interest rates for shorter term financing, usually five, seven, or 10 years. At the end of this term, they require refinancing or paying off the outstanding balance with a lump-sum payment. Balloon mortgages may be suitable if you plan to sell or refinance your home within a few years and want a fixed, low monthly payment.

The advantage they offer is an interest rate that is lower than that of a fully amortizing fixed-rate mortgage. For example, your initial interest rate may be 7.5%, and you would pay that for the first five, seven, or 10 years (depending on the term of your balloon loan). Then, your entire outstanding loan balance would be due to the lender or you might have to pay a fee to refinance your loan at the prevailing interest rate.

Be sure to ask about all the conditions for a refinance option at the end of the balloon term. With some balloon mortgages, the lender doesn't guarantee to extend the loan past the balloon date. If you don't feel you will be able to meet all the refinance conditions or think the balloon term may be up before you are ready to move, this type of loan may not be appropriate for you.