How Does a Balloon Mortgage Work?

by Nellie Day

How Does a Balloon Mortgage Work?
Function

Like credit cards, most mortgages offer low introductory rates that disappear after a given period of time, usually 5 to 10 years. Once this time period expires, the remaining balance on the loan is due. If an individual cannot pay the full balance, he must either sell or refinance the asset. Monthly payments from a balloon mortgage are typically lower than those of other mortgages. One thing owners should remember, however, is that the lending environment can be unpredictable. Therefore, the terms for refinancing may be more strict 7 years from now when the loan becomes due. The market may also have flipped, which can cause your property to depreciate, leaving you liable for the remaining balance on the balloon mortgage.

Uses

Balloon mortgages are more often seen in commercial real estate than in residential. This is because the low monthly payments that balloon mortgages display prior to amortization means that commercial owners and investors can maintain some level of liquidity while paying off the commercial project. This allows investors to place money in other projects. By the time the loan comes due, the investor or owner is then able to sell or refinance the home to avoid the large balloon payment.
Qualifications

Just like any other mortgage, the terms and rate of a balloon mortgage will vary depending on your credit score and history. Though most people with relatively good credit and a stable financial background will be able to obtain a balloon mortgage, not everyone will have the option to replace the balloon mortgage with a new loan that boasts low payments once it comes due. If you have been delinquent on a payment, you will not be able to replace the balloon mortgage. This means you will either have to refinance the loan or pay it off, because replacement is not an option.