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Godby Realtors

Balloon Mortgage

Balloon Mortgage

This type of mortgage is usually amortized over the traditional 30-year period, but the actual length of the loan, or the term, is much shorter. At the end of the term, the homeowner must renegotiate a new mortgage at the new current interest rates. The amount still owning at the end of a balloon mortgage term (that is the original loan amount less the payments made against the principle during the term) is then due in full. The homeowner will then have to obtain a new mortgage (either another balloon mortgage, or switch to a fixed-rate or adjustable-rate mortgage) to replace the expired one. The benefit of a balloon mortgage is that the interest rate is noticeably lower than that for traditional 30-year fixed-rate mortgages.

Please note that home buyers need to understand that...

  • Once a balloon mortgage is due their next mortgage will be set at the new current interest rates, which could be higher or lower than before.
  • They may not have a guaranteed renewal privilege and may have to go elsewhere to obtain a new mortgage.
  • They may have to financially re-qualify for the next mortgage.
  • Refinancing fees may be charged.
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