Balloon Mortgage

Financial Dictionary -> Mortgages -> Balloon Mortgage

Balloon Mortgage is a special type of mortgage, which requires monthly payment for a certain period of time, and paying the outstanding loan balance in full at the end of this period.

The balloon mortgage is a type of mortgage loan that often appeals to many home buyers that are young or taking a short term loan, of 10 or 15 years in length. This loan is like the standard mortgage loan in the respect that it has lower payments than many other types of loans. This is one reason why it appeals to young first time home buyers, because as they age and the loan matures, they expect that their income will have increased also. When the date of maturity arrives, there will be the demand for the mortgage to be paid in full to satisfy the loan.

The first option is to refinance to a conventional mortgage prior to coming to the end of the maturing of the loan. The other option, a two-step mortgage plan, is one that must be included in the loan agreement; it is also called a reset option. A mortgage will be reset if the balloon payments are not made.

There are some countries that do not allow mortgages with a balloon payment when the loan matures to be used for residential mortgages. In this case the lender must carry on the loan with the two-step mortgage plan.