Balloon home loans are home mortgages with a unique feature: these loans have a required one-time payment at the end of the loan that is much larger than the monthly mortgage payments. This balloon payment at the end allows the monthly payments to remain lower than they would be otherwise for the whole term of the loan. Aside from this one-time obligation, a balloon mortgage is the same as a typical fixed mortgage.
The balloon payment due at the end of the loan is usually over twice the size of the average monthly mortgage payment on the loan, and it is typically in the tens of thousands of dollars. The loan is paid in full once this balloon payment is made.
There are many reasons homeowners consider balloon mortgages. There are several distinct advantages to this loan option, as you typically do not need a down payment. It is also one of the easiest loans to get approved for. Home buyers who are struggling with a down payment, but expect to receive a sum of money in the future, may find that a balloon loan is the perfect solution.
Because the monthly payments are much lower, borrowers have more disposable income each year. Interest rates on balloon loans also tend to be very competitive and lower than regular loans because they are considered low risk. The typical balloon mortgage matures in five years rather than 15 to 30 years, as with most loans. Any remaining balance including the balloon payment that becomes due, can be refinanced.
Still, it is wise to consider the drawbacks before deciding this is the right loan for you. Some borrowers find it difficult to make the balloon payment at the end of the loan or refinance it into another loan. This can increase your risk of foreclosure.
The new balloon mortgage rules that took effect at the beginning of 2014 were designed to eliminate traps for borrowers. The Qualified Mortgage Rule affects balloon loans.
A Qualified Mortgage is designed to prevent borrowers from taking on mortgages they cannot afford. Lenders are required to meet QM guidelines for federal protection if the borrower at some point defaults on a mortgage that is considered "safe." Qualified Loans may not have any features defined as risky.
Risky loans have features such as a term of more than 30 years, negative amortization (or monthly payments that do not keep up with interest charges), or interest only mortgages. Balloon loans are typically considered "risky" loans, which means balloon loans do not meet QM standards. This does not mean you cannot get a balloon mortgage, only that they are more difficult to find and obtain today than a few years ago.