Balloon mortgages are most commonly used for commercial mortgages. Balloon mortgage payments do not fully amortize over the term of the note, the last payment includes all remaining interest and unpaid principal, and often comes to quite a large total. This creates a certain amount of risk, but they can be quite beneficial if a borrower is anticipating immediate cash flow for his/her business venture. Balloon mortgage loans are a good product for people looking for a lower interest rate.
Adjustable rate mortgages are sometimes confused with balloon payment mortgages. The difference is that a balloon payment may require refinancing or repayment at the end of the period (if you are unable to repay the entire balance); some adjustable rate mortgages do not need to be refinanced, and the interest rate is automatically adjusted at the end of the applicable period. Balloon payments are often prepackaged into what are called "two-step mortgages." In this type of mortgage, the balloon payment is rolled into a new or continuing amortized mortgage at the prevailing market rates.
Balloon mortgages are most popular with 2nd mortgage notes, such as a 30 year amortized note due in 15 years (30/15). The monthly payment with a 30-year amortization will be lower than if the property is financed with a 15-year mortgage. The interest rate for the five or seven-year period may be lower than the rate for a 30-year fixed rate mortgage. The goal with a balloon payment mortgage is to obtain a low, fixed monthly payment with the plan of selling the property at a profit before the balloon payment is due. You can also refinance your balloon mortgage prior to its maturity and obtain a new fully amortizing loan.