Balloon Payment Mortgage

Among the many different mortgage plans and models available to prospective home buyers, there are several lesser-known financing options that may help you fit a home purchase into your financial plan better than a traditional fixed rate or ARM. Of course, each option needs to be examined carefully in order to determine whether it truly is the right one for you or not. One less common type of mortgage payment is the balloon payment mortgage.

Balloon Payment vs. Fully Amortizing Mortgage

A balloon payment mortgage essentially leaves some or all of your principal loan amount due at the time of your loan’s maturity. It functions very much like an interest-only mortgage, but with a couple of key differences.

Paying Off Traditional Mortgages

People who choose to go with a balloon payment mortgage will make a monthly payment just like anyone else who owns a mortgage. The difference is that with a typical, fully amortizing loan, each monthly mortgage payment will go toward both reducing the amount of the loan principal itself and paying off the interest on the loan as well. At the end of the loan term, the principal balance is zero.

Paying Off a Balloon Payment Mortgage

With a balloon payment mortgage, on the other hand, the majority of the monthly mortgage payment will go towards the interest owed on the loan, with a small amount or even none of it applied to the principal. When the loan matures, most of the principal amount borrowed remains largely unpaid. Therefore, when the mortgage loan term is up, there is still a final payment left to be made–a hefty sum at that. The last payment, in other words, will “balloon” to include whatever is left of the principal, which needs to be paid at that time.

By delaying paying off the principal amount and putting most funds toward interest payments only, initial monthly payments are reduced and easier to afford. The often difficult part of this type of loan comes when it’s time to pay down the balloon portion. Borrowers should only consider this option when they are certain they’ll have the money available to pay of this loan when the term is up.