Balloon Mortgages
 alloons are like 30 year fixed rate mortgages, but after the first five or seven years, you have to repay the entire loan balance.
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| Advantages |
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| It is easier to qualify. |
| Since a balloon is effectively a very short loan (five to seven years) the lender is taking less risk. This makes it a lot easier for the lender to qualify you for it. |
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| It gives you five or seven years of protection from rate increases. |
| If the lender is taking less risk, they are willing to loan you more money. So, if you are set on buying your dream home and you can barely afford it, this can be very helpful. |
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| Your initial interest rate is lower than a 30 year fixed loan. |
| Since the rate is fixed for only five or seven years, the lender doesn't need to charge as high of an interest rate as they do on a 15 or 30 year fixed rate mortgage. |
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| Disadvantages |
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| Your interest rate might go up. |
| If, after the five or seven years are up, you have to refinance the mortgage, your payments will increase if rates have gone up. |
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| You are forced to refinance or sell in five or seven years. |
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- If the housing market takes a dive, you may not be able to sell the house for as much as you owe on the loan.
- Since most people who get a balloon had trouble qualifying in the first place, there is no guarantee that they will be able to qualify for a refinance loan in five or seven years.
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| Common types of balloon mortgages |
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| 5 year balloon |
| A loan with a fixed interest rate and monthly payments in which the balance of the loan becomes due after 5 years in one "balloon" payment. |
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| 7 year balloon |
| A loan with a fixed interest rate and monthly payments in which the balance of the loan becomes due after 7 years in one "balloon" payment. |
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| Example $100,000 loan |
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5 year balloon
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7 year balloon
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Interest rate |
6.250%
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6.500%
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Monthly payment |
$616
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$632
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