What is balloon amortization?

A balloon payment is a large one time payment that is made to pay off a loan. A balloon amortization mortgage loan is offered by many lenders as a way to refinance your home loan if you can qualify certain credit worthiness.

A mortgage amortization loan followed by a balloon payment is sometimes one of the main reasons people fall into the foreclosure trap.  Mortgages that are set up on a balloon mortgage get paid out in monthly installments for a select time period. At the end of this time frame, one lump sum payment is made to pay off the mortgage amortization.


Typically a balloon amortization mortgage is set on a 3, 5 or 7 year term. By financing and structuring the loan this way, it usually has a smaller interest rate but payments can span as many as 30 years with the same interest rate.


Advantages of a balloon amortization are mainly if you know you are going to sell your house before the balloon payment becomes due or if you know you can pay off the loan early / on the balloon date. Another advantage is if your interest rate is high, and you think that the rates may trend to go down before the balloon and you plan to refinance.


Most loans pay on interest and principle. When the term of the loan ends, the payments are paid in full. With a balloon mortgage amortization, this is not the case. Monthly installments include only part of the interest and very little principle. When the term expires the note is due in full, leaving the borrower a very large sum to come up with.  


In most other loans, monthly payments do not only pay off the interest but also chip away at the principal amount - the original amount owed. Thus at the end of each loan term where balloon payment is applied, no money is owed.


Balloon mortgages are usually based on a 30 year amortization, but you actually only have 3, 5 or 7 years to pay. That in itself doesn't let you have enough time to pay on the principle significantly. In other words, it often times feels like you are only paying on interest.  At the end of the note, sometimes you can reset the loan but you have to meet certain criteria. In order to reset your loan, you have to still occupy the home, having no liens against the property, and should have made on-time monthly payments for the last year. If you don't qualify to reset the mortgage, you may be able to still refinance the loan.


You may also find that due to a reverse in your financial situation you many not qualify to reset or refinance your home, and have to sell it to meet the balloon payment.


A tip for home borrowers is that when you take on a balloon payment mortgage, make sure that the due date will give you significant time to make the payment. With balloon payment mortgages, if you can't pay the lender the amount on the due date, you might have to foreclose and lose the property. We have witnessed many foreclosures this year from balloon payment mortgages, from people that have paid all other payments on time every month. If you feel this type of loan may be right for you, check with other lenders or a financial specialist.

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