How do they work?
In general,  Balloon Mortgages have fixed rates and terms of 5 or 7 years. However, when the term expires, a final, large balloon payment is due to pay off the loan balance. At that point borrowers will either refinance or sell the home before this balloon becomes due. Some Balloon Mortgages include a conditional right to convert the Balloon Mortgage into a fixed rate mortgage for the remaining term. This is called a conversion option. The lender charges a nominal fee to convert the loan when the Balloon payment is due.

 

What are the benefits of a Balloon Mortgage?
With a Balloon Mortgage, the rates are lower than on a 30-year Fixed-Rate Mortgage. This allows a borrower to qualify for a larger home because of the lower interest rate - and therefore the lower monthly mortgage payment - is lower.

Balloon Mortgages are a good option if you:

Will be selling your home in the near future.

Feel that interest rates will decline in the future.

Expect to refinance before the balloon payment is due.