Balloon Payment Mortgage

Balloon Payment Mortgage is a mortgage that usually requires a lump sum payment at the end of the loan period because the loan is not fully amortized throughout the term of the loan.
The payments are based on a 30 year amortized loan but the remaining balance also known as the balloon payment of the 30 year mortgage will come due in five to seven years, depending on the loan agreement.
Often the lump sum is about 80% of the borrowed amount. The majority of the payments made throughout the loans life are applied toward the interest.
Balloon Payment Mortgages are more popular with commercial real estate than that of personal or residential real estate.
Borrowers who are unable to pay the balloon payment at the time its due, may be eligible for the conversion option or reset option which fully amortizes the remaining balance at current market rates , usually for another 23 years.
They may also opt for a conventional second mortgage, which typically amortizes the loan for an additional 15 years.
If not, the borrower may apply for another loan to cover the balance due or sell the property or in worst case scenario lose the home through lender foreclosure.
Some conditions of the conversion option or reset option are the following:
1) the borrower still owns the property, 2) has no delinquent payments in the previous year (12 months), 3) has no other liens against the financed property.
If you do not plan or are unable to pay the balloon amount at the end of the term of the loan, you should begin to apply and plan for refinancing as soon as possible to assure that you will be able to refinance the loan before the due date of the balloon payment.
This also helps to cushion for the fluctuations of interest rates and uncertainties.
Balloon payments benefit the lender because they give the lender extra security against risky interest rates but can be risky within themselves if the borrower is unable to pay the lump sum at the end of the term of the loan.

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