Balloon Loans

Balloon loans offer lower interest rates for shorter term financing, usually five, seven, or ten years. At the end of this term, they require refinancing or paying off the outstanding balance with a lump-sum payment. Balloon mortgages may be suitable if you plan to sell or refinance your home within a few years and want a fixed, low monthly payment. The advantage they offer is an interest rate that is lower than that of a fully amortizing fixed-rate mortgage. For example, your initial interest rate may be 7.5 percent, and you would pay that rate for the first five, seven, or ten years (depending on the term of your balloon loan). Then, your entire outstanding loan balance would be due to the lender or you might have to pay a fee to refinance your loan at the prevailing interest rate.