Balloon loans are short term mortgages that
have some features of a fixed rate mortgage. The loans provide a level payment
feature during the term of the loan, but as opposed to the 30 year fixed rate
mortgage, balloon loans do not fully amortize over the original term. Balloon
loans can have many types of maturities, but most balloons that are first
mortgages have a term of 5 to 7 years.
At the end of the loan term there is still a
remaining principal loan balance and the mortgage company generally requires
that the loan be paid in full, which can be accomplished by refinancing. Many
companies have other options such as a conversion feature at the end of the
term. For example, the loan may convert to a 30 year fixed loan at the thirty
year market rate plus 3/8 of a percentage point. Your conversion can be
guaranteed based on certain criteria such as having made your last 24 payments
on time. The balloon mortgage program with the conversion option is often called
a 7/23 Convertible or 5/25 Convertible.
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