Balloon Mortgages

Balloon mortgages are, at first glance, very similar to fixed rate mortgages. Balloon mortgages feature the same type of level payments during the term of the mortgage. However, balloon mortgages differ because they are designed as only short term loans. Also, balloon mortgages do not fully amortize, or pay off, at the end of the loanęs term. Balloon loans can last for a variety of time periods, but they are most often set up to mature at five to seven years.

Because they do not fully amortize, balloon loans leave an unpaid balance at the end of their term. At the end of the loan, the mortgage company generally requires the loan to be paid in full. This full repayment is most often accomplished through refinancing. Refinancing is common to many mortgages, not just balloon mortgages. Almost all of the balloon mortgages offer some type of refinancing to repay the remaining principal.

However, traditional refinancing is not always the answer to repaying the remaining principal left at the end of a balloon mortgage. One option commonly available for this repayment is the conversion feature, available at the end of the balloon mortgage term. In a conversion, the balloon mortgage automatically converts to another loan. For example, a loan might convert to a fixed mortgage loan at a rate 3/8 of a percentage point more than the 30-year market rate.

These conversions may be guaranteed based on the fulfillment of certain conditions. For example, this condition may be something like having made your last 24 mortgage payments on time. Balloon mortgages with conversion options may also be called 7/23 convertibles (balloon mortgage term of seven years) and 5/25 convertibles (balloon mortgage terms of five years).