A balloon mortgage is a home loan with low monthly payments for a few years, after which you must pay the remaining balance in a lump sum. You get a lower interest rate than with longer-term fixed-rate mortgages, in exchange for having to pay off the outstanding loan amount after a set period, often between five and 10 years.
Balloon loans are rare because they're considered risky.
Who a balloon mortgage is for
A balloon mortgage may be suitable if:
You're certain that you will sell the property before the balloon payment comes due.
You're sure that you'll receive a lump sum at least equal to the balloon payment before it comes due. That could be something like a bonus or series of annual bonuses, an inheritance or the sale of another property.
You'll refinance the loan before the end of the term.
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5.0
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Balloon mortgage pros and cons
Pro
You’ll probably get a lower interest rate than with a typical fixed-rate loan — and that means a lower monthly payment.
Cons
Despite your plans, you might not be able to sell or refinance.
Interest rates might be higher when you need to refinance before the balloon payment is due, leaving you with higher-than-expected monthly payments.
Your expected financial windfall might not arrive.
If you can’t make the balloon payment, the lender can foreclose on the house.
A balloon mortgage could be hard to find
Balloon mortgages were a thing back in the Wild West days of home loans, just before the housing crash of 2007-08. Today, they can be hard to find. Balloon loans might be available from small lenders.
An adjustable-rate mortgage might be a better solution for most short- to mid-term borrowers because ARMs have rate caps that limit how high the interest rate can rise. Even better: There’s no ticking time bomb of a looming balloon payment.
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4.5
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5.0
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4.0
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4.5
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5.0
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on Bethpage Federal Credit Union