Getting to Know Balloon Loans

Posted on February 12, 2007

Balloon loans are another type of adjustable rate mortgage loans, and they are considered to be one of the better types of mortgage loans available as the homeowner can refinance the loan after 5 about years. This type of short term mortgage has characteristics of both fixed rate and variable rate mortgages.

It is different than the standard 30 year mortgage in that balloon loans do not amortize over the original term of the loan. The term “Balloon” means that the balance due at the end of your term will be repaid or refinanced and it can pertain to more than homes, but vehicle purchasing as well.

They are starting to become more and more used by financial institutions as an alternative to leasing. The loan allows you to have much lower interest rates and the borrower has the choice of using the accessible capital during the extent of their loan, for the most part the repayment is delayed until the end of your agreed payment period.

Since your entire amount due on the loan needs to be repaid at the end of the term, most choose to refinance or change their loan to a fully amortizing loan either fixed or variable rate, based on their outstanding principal balance and the current interest rates.

If you refinance the loan at maturity you do not need to be qualified for the loan again nor does the property need to be re-approved; however there might be a small processing fee to attain the new loan.

Other articles of interest: