Many borrowers out there are not exactly sure what the definition of a balloon mortgage is. This type of loan is not long term, but a short term mortgage. This loan is commonly compared to a traditional fixed-rate loan because it happens to share many of the same qualities and features. A balloon mortgage loan is much like a traditional mortgage because it offers the borrower a set amount of money that is due back in a certain amount of time. But unlike a regular mortgage this type will not amortize during the set term, and typically has one of many maturity types.
Most of the time when someone takes out a mortgage loan they will obtain a mortgage that is supposed to be paid in full within a certain amount of time. The length of time when a loan is due is called a “loan term.” Same goes for a balloon mortgage, these have a set term as many others do as well. But the monthly payments the borrower is making is not sufficient to the repayment of the loan. So because of this the borrower will have to pay the remaining balance of the loan in a lump-sum, once the loans term is up.
Most mortgages that lenders offer their customers will be for a length of 15, 30, or even 40 year loans. With a regular loan the borrower will be free and clear of the debt once the loan term is up and all of the monthly payments were paid. But a balloon mortgage will usually only extent its term for about five to seven years depending on the company and circumstances (some cases the term is much longer). At the end of the term the borrower is not clear of the debt once all they have made all the monthly payments. The end of the mortgage term is called the “maturity date.”
Many people find this type of loan a very bad decision because you must maintain your budget well enough in order to pay the lump-sum on the maturity date. This is the main disadvantage borrowers find with this type of loan. On the other hand others might find a balloon loan to be of the advantage because they will often carry a very low interest rate, therefore allowing the borrower to save up extra cash for the large lump-sum.