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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. |
