Balloon Mortgage

A balloon mortgage is a mortgage loan that has a relatively short repayment period (5 to 7 years), at which point the entire balance is due. Or, uh…balloons.

For example, Joe buys a house with a $200,000 mortgage at 6% under a 5-year balloon structure. Joe pays $1,200 a month for 7 years, at which time the balance of $127,964 is due.

Balloon Pros: Lower interest rate and monthly payment than conventional loans. Good for someone expecting a dramatic change in economic status, or someone who doesn't envision keeping that house for a long time (from 1985 to 2008, U.S. homeowners moved every 6 years on average), or expects to refinance at the end of the 7-year period.

Balloon Cons: Static or reduced income status leaves the owner in dire straits after the seventh year.