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.
