Understanding Balloon Mortgages
A balloon mortgage is a type of loan where the monthly payments are calculated based on a longer term (like 30 years), but the entire remaining balance is due at the end of a much shorter term (like 5 or 7 years).
The primary benefit of a balloon mortgage is that it often comes with a lower interest rate than a traditional 30-year fixed mortgage, leading to lower monthly payments during the initial term.
The Final Balloon Payment
The main risk is the large final payment due at the end of the term. Borrowers typically plan to sell the property or refinance into a new mortgage before the balloon payment becomes due.