Question:

What is a balloon mortgage?

Answer:

What a balloon mortgage is you could easily guess by seeing loans represented with numbers as 5/25 or 7/30. It is a mortgage calculated to amortize in, say, 25 or 30 years and after making regular payments for the first 5 or 7 years, you will have to pay the remaining balance due (called the balloon) in one big lump sum payment.

A balloon mortgage is risky to take since you may not have the option to convert the balloon into a fixed rate mortgage loan when the balloon comes due. You might have to refinance before the balloon term expires, or may get stuck with a balloon payment.

People used to take balloon mortgages for the same reason they now take ARMs - when they thought they would rather sell the house or refinance at the end of the initial period, or would have secured higher income and could afford the balloon payment, respectively ARM payment and rate adjustment.

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