Another type of mortgage that has become popular in recent years is the balloon mortgage, so-called because it requires you to pay off your loan in full or refinance at the end of the mortgage term (usually five or seven years). The advantage of a balloon mortgage is that your monthly payments during the mortgage term are generally lower than they would be for a traditional 30-year fixed-rate mortgage.
Balloon mortgages are traditionally popular with first-time home buyers with growing families and with individuals who expect to be relocated by the employer. If you anticipate moving in five to seven years, you can take advantage of lower interest rates (sometimes from three-eighths to three-quarters of a percentage point less than traditional fixed-rate loans) for that time period. If you end up staying longer in your residence then you’ll have to pay the balance at the end of the term, or more likely, refinance your mortgage at the then-current interest rate. Many lenders also offer an option that allows you to convert to a fixed-rate mortgage, provided certain conditions are met.
Qualifications for a balloon mortgage vary depending on the lender you choose, but most require at least a 20% down payment.
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