What is a balloon mortgage?

A balloon mortgage refers to a mortgage that has low or no initial payments and instead requires a full lump sum cash payment at the end of the mortgage period. Due to this payment structure, balloon mortgages are considered as a risky form of mortgages. 

Balloon mortgages are usually fairly short termed and last for about 5 to 7 years. In the case where you are required to make monthly payments before your lump sum payment, your payments will be interest-only and the interest rate is usually fairly low. Balloon mortgages are generally only recommended for people who expect to stay in their homes for a short period of time. Another case for choosing a balloon mortgage is if you intend to stay in your home and refinance before your balloon mortgage period expires. In such a scenario, most people expect to have a rise in income and can therefore foresee paying larger monthly payments. 

However, as mentioned before, there are many risks associated with this type of mortgage. For instance it can affect your equity. Home equity refers to the difference between the current market value of your property and any outstanding balance on the house. With balloon mortgages, the homeowner has very little equity in the home and therefore their only real choice is to sell the house or refinance it. Depending on market rates, this may be very difficult to do.