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What Is A Balloon Mortgage In Real Estate?
Balloon mortgages require low monthly payments or even interest-only payments, only for the borrower to be expected to pay the full balance as a lump sum at the conclusion. This type of mortgage gets its name because of the ballooning price when the ultimate payment is due.
Balloon mortgages — which can last for as little as two years, but typically last five to seven years — decreased drastically in popularity following the Great Recession. Since the loan is typically paid off in a shorter time, it can drastically reduce the overall cost for buyers, but it can be a risky investment for both the buyer and lender.
These mortgages may include fixed or variable interest rates. Buyers seeking economic certainty might prefer fixed-rate mortgages since they ensure that the interest rate will remain consistent throughout the duration of the loan terms. Variable interest rates, on the other hand, typically include lower monthly rates initially, but they can change and fluctuate with the market.
Interest rates are especially important to note in balloon mortgages, because they often include interest-only monthly payments, which can equip homebuyers to sign on for the required low payments before rendering their full lump sum upon its due date. Balloon mortgages may appeal to homebuyers who plan to have their homes for shorter periods of time.