A balloon mortgage is a fixed-rate loan with a set payment for a specific number of years -- usually five to seven. At the end of the loan's term, a "balloon" payment for the loan balance is due. As these loans often offer a lower interest rate and monthly payment, you may qualify for a larger loan amount.
Although the terms of a balloon mortgage may sound similar to an ARM, there are major differences. For example, a balloon mortgage's rate will not adjust after the initial fixed-rate period ends -- instead, you can refinance your balloon mortgage or pay off the balance. Also, a balloon mortgage's interest rate is often lower than an ARM's rate.
A balloon mortgage can save you money if:
- You plan to sell your home before the end of the term
- You plan to refinance your home before the end of the term
- You're prepared to pay off your loan at the end of the term
- You want to avoid the rate adjustments that are part of an adjustable-rate mortgage (ARM)
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