A balloon mortgage is a loan where the total amount comes due in less time than the loan term. For example, a loan can be "30 due in 15". This means that the loan payment is calculated as if the loan were for 30 years. The entire loan must be repaid after 15 years. The longer a loan's term is the lower its payment is. A 30 year loan has a lower monthly payment than a loan amount for a similar loan amount that is due in 15 years. The reason in this case for offering this is that it offers a lower payment over the 15 years because the loan is being repaid at the 30 year rate. These types of loans are often offered to borrowers as second loans. Although the loan is due in 15 years most borrowers do not keep the property or the mortgage long enough for the full loan amount to come due. An example of a balloon payment is as follows: Loan amount: $375,000 Annual interest rate: 6.50% Loan payment term in years: 30 Year of balloon payment: 15 Monthly payment: $2,370 Total monthly payments over time: $426,646 Balloon payment: $272,097 Total interest payments: $323,743 Total payments made: $698,743 As stated earlier, in many cases a loan is refinanced before the full amount is due. |
