What is a Balloon Payment Mortgage?
A Balloon Payment Mortgage is a mortgage which is not resolved, or amortized, over the term of the note leaving a final payment which is to be paid at the ending of the payment plane. Because of the normally larger size of the terminating payment, the final payment is often referred to as a balloon payment.
Balloon Payment Mortgages are more popular with lenders who deal in commercial real estate, rather than residential real estate. A Balloon Payment Mortgage may have a fixed or an adjustable interest rate.
When talking about a Balloon Payment Mortgage it is normally referred to using specific terminology, for example X due in Y where X is the amount of years before the term is up and Y is the year in which the principal balance is required.
If a borrower is unable to, or does not have the resources necessary to make the balloon payment at the end of the loan term, what is known as a “two step” or “reset option” mortgage plan my be used. This mortgage plan is crafted so that when the first term expires the mortgage note will reset using current market rates and a new payment schedule. This option is not technically automatic, and may only be offered under certain circumstances which are determined by the lender.
While Balloon Payment Mortgages can sometimes be confused with adjustable rate mortgages, the difference is that the balloon payment may require refinancing or repayment at its end, where as most Adjustable Rate Mortgages are resolved at the end of their term, if everything goes according to plan.
The most common way of repaying a residential loan is referred to as an amortizing payment or amortization. Within this principal, parts of the principal are being repaid along with payments on the interest of the loan. There are two different subsets of amortization:
- Full amortization; where the payment schedule has been set so that the final payment completes any and all remaining balances on the principal.
- Partial amortization; is where a payment will still be required at the end of the principal term, normally either to be repaid in full or set up for refinance, respectively.
Balloon payments are often restricted as the option to refinance at the end of the principal loan term carries with it an added risk as at the time of the refinance the borrower may not have the ability to do so.