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.
