A less conventional type of home loan is the balloon mortgage; unlike with other mortgages, there is a large amount of principle that the borrower must either refinance or pay off when the end of the mortgage’s term has been reached. Here are some more details on what a balloon mortgage is, along with an explanation of its pros and cons:

With this kind of mortgage, the borrower usually receives a lower interest rate and makes monthly payments for a term of five to ten years. Occasionally these mortgages offer longer terms like 15 or 40 years. Unless the home is resold beforehand, he or she is required to repay or refinance the “balloon payment” (the remaining principle) at the end of this term, which is likely to be a substantial amount.

This could become a problem if the borrower isn’t able to secure refinancing. There is also the drawback of having to pay closing costs when the loan is refinanced. Some banks and other lenders will guarantee the home owner that the option of refinancing will be available when the term expires. An advantage of balloon mortgages is that they are available in both fixed and adjustable varieties.

A downside of taking out a balloon mortgage is that the speed of building equity is slow. This means that it will take longer for the owner to be able to take advantage of home equity loans, second mortgages, or reverse mortgages. If the home is sold, a greater amount of principle will need to be paid back because of this. On the other hand, the borrower’s monthly payments are lower with this type of mortgage.

When the real estate market is going well, borrowers who aim to resell their properties might prefer to use these mortgages. Reselling the home before the term ends would eliminate the “balloon payment” and refinancing issues; also, the smaller monthly payments could make it easier for the owner to afford making repairs or improvements on the property intended to increase its resale value.

Overall, this kind of mortgage offers the advantages of a lower interest rate and the option to obtain a fixed rate, but has the drawback of needing to pay or refinance the balloon payment. Banks that offer this type of mortgage include MetLife, Nationwide, and Wells Fargo. Some local banks and credit unions also provide balloon mortgage options.