Balloon mortgages are so called because the borrower pays the entire principal balance in one balloon payment after the loan matures. For first mortgages, only the interest is paid for the five or seven-year loan term. This type of special loan is comparable to a 7Y/1Y ARM where the interest rate remains stable for the first seven years. In fact, it is even calculated in the same manner as that of a 30-year loan. But after the 7-year period, the balloon mortgage has to be paid off in full.
To illustrate: Let’s say that you get a $100,000 loan at 6 percent on a seven-year balloon mortgage. After paying for seven years, the remaining balance of around $89,600 has to be repaid fully. If you don’t have the money pay off this remaining principal balance, you will either have to refinance or sell the property.
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