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Mortgage Loans 101: What's a Balloon Loan?

Written by: Brandon Cornett

When buying a home and evaluating your mortgage loan options, you'll likely encounter the term "balloon loan." This type of loan allows you to make fixed payments for a certain period of time, but then requires you to pay off the remaining balance in one lump-sum payment.

Key Points of the Balloon Loan

* The interest rate on a balloon mortgage loan is almost always lower than the interest rate on a traditional 15- or 30-year mortgage loan. This is the primary benefit offered by this type of loan.

* The result of the lower interest rate, of course, is a lower overall monthly payment.

* Balloon mortgage loans usually have a term of five to seven years. After that, you must pay off the remaining balance in full (either by refinancing or paying out of pocket).

* Some balloon loans can be converted to a fixed-rate mortgage loan at the end of the original term. In such cases, the fixed-rate loan will take on current interest rates at the time of conversion.

* A balloon loan may be a good idea if you only plan to stay in a house for five to seven years. It can save you money each month, and if you sell the house before the term ends, you'll avoid the lump sum payment.

Before deciding whether or not a balloon loan is right for you, you should educate yourself on all of the loan types. It's also a good idea to seek the advice of a qualified, reputable mortgage professional.

Conclusion

If you only plan to stay in a home for a few years, a balloon loan might be a good option for you. In most cases, a balloon loan will offer lower interest rates than a conventional, long-term loan. Educate yourself before choosing a balloon loan, and be sure to have a plan in place for when the loan terms ends. Always seek the advice of a qualified mortgage professional.

* Copyright 2006, Brandon Cornett. You may republish this article in its entirety, provided you keep the byline, author's note and website hyperlink intact.

About the author:

Brandon Cornett is the editor of HomeBuyingInstitute.com, one of the Internet's largest libraries of home buying information -- over 100 expert articles on home buying and home mortgage loans! Learn more at: http://www.homebuyingin stitute.com


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