BALLOON LOANS

Balloon loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. They mostly have terms of 3, 5, and 7 years.

The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30 and 15 year mortgages, which hold lower monthly payments. The disadvantage is at the end of the term, because you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.

Balloon loans with refinancing options allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan -- based upon the outstanding principal balance -- if certain conditions are met. If you refinance the loan at maturity, you do not need to qualify, nor must the property be approved for a second time. The interest rate on the new loan is the current rate at the time of conversion. There might be a minimal processing fee to obtain the new loan. The most popular terms are 5/25 Balloon, and 7/23 Balloon.