A balloon mortgage is a mortgage that doesn’t fully amortize over the term of the loan. Instead, at the end of the loan term, a large portion of the principal balance is repaid with a single payment. The borrower must decide to either pay the loan balance in full, refinance or sell the home.
A balloon mortgage has certain advantages. It typically has lower interest rates, lower monthly payments and is easier to qualify for than a loan with a 15 or 30-year term. Most borrowers that use a balloon mortgage intend to sell the home before the balloon payment is due.
If the buyer decides to refinance the mortgage at the end of the term, one disadvantage of a balloon mortgage is that interest rates at that time could be higher and your monthly payment could increase significantly. If the borrower is unable to refinance they still need to pay off the loan and could be forced to sell the home or face foreclosure.
Like anything, there are pros and cons to using a balloon mortgage, so know the details and make a decision based on your personal financial situation.