Like Fixed Rate Mortgage

• A balloon mortgage has some characteristics of a fixed rate mortgage in that the borrower will have fixed payments. The fixed payments usually last five, seven or 10 years, according to the U.S. Department of Housing and Urban Development. Then, the balloon will come due.
  
  

Like ARM

• When the balloon does come due, that means it is time for the borrower to pay off the rest of the mortgage in one lump sum. Since not many people can do that, most borrowers will refinance the loan to a more traditional loan. After refinancing, the payments will usually be higher due to a higher interest rate or because of more money going toward the principal, or both. In that way, the balloon mortgage is like an Adjustable Rate Mortgage (ARM).
  
  

Advantages of Balloon Mortgage

• People choose a balloon mortgage for lower monthly payments and a lower interest rate than they could get with a traditional fixed mortgage. Payments are lower because borrowers are typically paying mostly interest on the loan and little principal, according to the Pennsylvania Office of the Attorney General. Some people also prefer or need to know what their payments will be each month for budgeting purposes, which is not the case necessarily with an ARM.
  
  

Reasons for Choosing Balloon Mortgage

• Some people plan on moving before the balloon is due, so they choose a balloon for the lower payments. People may also choose a balloon if they are in a financial situation that they know will improve in five to seven years because of getting an expected raise or promotion. Or, if they have a debt that they know will be paid off by then, a balloon might be the way to go, because once the debt is paid, they can afford the bigger mortgage payments. A balloon mortgage can also get people in a bigger home that they will be able to afford later when their financial situation changes.
  
  

Risks of Balloon Mortgage

• The likelihood of your losing your home is greater with a balloon mortgage. Say, for example, that the raise you were anticipating never happens, perhaps because of a downturn in the economy. In that case, you may not be able to refinance the mortgage when the balloon comes due, in which case, the bank will foreclose. Another risk is that interest rates may be high at the time your balloon comes due. In that case, your payments could be unaffordable. Property values don't always rise. If you were planning to sell the home before the balloon comes due, you may not be able to sell it for what you paid. You must factor in all these risks before deciding to take out a balloon mortgage.