September 27, 2006 5:48 PM
What Is Balloon Payment Mortgage?
A “Balloon mortgage” is a non-amortizing loan. Unlike many other mortgage loans, a balloon mortgage loan does not pay itself off at the end of the loan term. At the end of the loan’s term, a portion of the principal remains and comes due in a single payment. In this type of mortgage loan, you will be assessed a series of equal monthly payments. After these payments have been made, the borrower will have to make a large final payment, which is called the balloon. Typically, monthly payments are set based on a 30-year amortization schedule, terms balloon based loans can range from 1 to 25 years.
Balloon mortgages are also usually fixed-rate mortgages, but the monthly payments you make will most likely only include interest. The balance will be due after a short period of time, such as three to five years. If you take out a $100,000, five year balloon mortgage at an annual percentage rate of 15%, your monthly payments will most likely be $1250. To get this figure, multiply $100,000 by 0.15. This represents the interest charge for one year. To get the monthly payment, divide this figure further by 12. In this example, however, your monthly payments will cover only the interest charges. You will have to make other arrangements to pay off the principal when the time comes.
At the proposed maturity date, the principal of the mortgage loan becomes due. Under the terms of the deal, you will have to make that final payment. If you are unable to do this, you may solve this situation by taking a second mortgage, refinancing, or simply selling your house at its current market value.
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