A balloon mortgage is a short term mortgage that has some features of a fixed rate mortgage. Basically it is a short-term mortgage in which small periodic payments are made until the completion of the term. Upon completion of the term, the balance is due as a single lump-sum payment.
It is called a balloon mortgage because the large size of the final payment. Balloon payment mortgages are more common in commercial real estate than in residential real estate. A balloon payment mortgage may have a fixed or a floating interest rate.
Balloon mortgages are sometimes confused with adjustable rate mortgages. The difference between the two is that a balloon mortgage may require refinancing or repayment at the end of the period, where as some adjustable rate mortgages do not need to be refinanced, and the interest rate is automatically adjusted at the end of the applicable period.
Two important considerations to make when deciding on choosing a balloon mortgage are:
A balloon mortgage may be a good choice if you plan to sell or refinance your home within seven years and you want a relatively low monthly payment during that time.
The refinance option may provide a "safety net" if a planned relocation does not take place or economic conditions prevent you from moving to a larger home.