What Is a Balloon Mortgage?
Disclaimer: Due to market conditions, Quicken Loans currently does not offer balloon mortgages. Check out our other home loan options and low mortgage rates .
A balloon mortgage is a short-term fixed-rate loan in which the principal and interest payments are due for a set number of years, usually five, seven, or ten years. After that, the remaining loan balance is due in a “balloon payment,” meaning you pay off the remaining loan balance in one large final payment. The balloon payment can be paid by refinancing to a new loan.
Homeowners who choose a balloon mortgage do so because it comes with a lower rate (thus a lower payment) than a comparable 30-year mortgage.
An adjustable rate mortgage (ARM) can also give you a lower rate as well. However, there is a difference-with a balloon mortgage, your interest rate will change only once when you refinance it. If you have an ARM and don’t refinance after the initial fixed-rate period, then your ARM can adjust as often as every six months or every year. When it does, the rate could adjust to a much higher level and you could experience a payment shock.
It’s typical, even common, for a homeowner to move within ten years,
so it can help you if you don’t plan to live in your home for longer than that. How? Because it gives you a fixed rate for the term of the loan. If you have a seven-year balloon mortgage, you get a fixed rate for seven years and you wouldn’t have to worry about your rate and payment going up.
But be aware that the right to refinance is not guaranteed. You need to keep your credit and finances in good standing in order to refinance at a later date. There are some balloon programs that will allow you to fix a rate at the end of the balloon period (based on current market). Check with your lender to see if other conditions must be met.
Getting a balloon mortgage is a good way to get a lower rate and payment than a 30-year fixed rate or adjustable rate mortgage if you plan on moving by the time the loan term is up. Just be sure that it is the right loan that fits your situation.
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