What Is A Balloon Mortgage?



Video Summary


What is a balloon mortgage?  That certainly is a strange word to use, but it is a legally-defined term, and it means a mortgage brand or is a payment that is twice the amount of the regular payments that are paid.

Best way to illustrate this is let’s say that you have a $100,000.00 mortgage, and you set the payments out so that it would be paid out over a period of 30 years.  So let’s say the payments are $500.00 a month, and we won’t go into the interest rate, but you pay $500.00 a month for five years, and then the note says it becomes due and payable in five years.

Well, you haven’t paid off the $100,000.00 in the five-year period so after five years you’ll still be owed probably $60 or $70 or $80,000.00 on the $100,000.00, and that’s called the balloon payment.

So that’s the illustration or an example of a balloon payment, which is whenever you have regular periodic payments, and then you have a very large payment that becomes due and payable.  Most of your commercial mortgages these days also set up a balloon payment.  They spread your mortgage payments out over a 15- or 20-year period, but they say the loan becomes due and payable after three or five years, and certainly if you have investors involved, that can be the case with residential property whenever you have owner financing.

If you use a balloon mortgage on a residential property, and it’s a second mortgage, then the statutes provide that you must have certain bold-faced language at the top of the mortgage and also above the signature page indicating this is a balloon mortgage and setting forth the amount of the balloon payment, and that’s so it’s basic consumer protection type situation so someone can’t say, “Well, oh, I thought I’d have this thing paid off in five years.”  Well, if there’s a principal balance above where you sign it, well, you’ve got to sort of be blind in one eye and can’t see out of the other if you can see that the principal balance is not going to be paid off when the loan becomes due and payable since they set forth a balloon payment.  There are some penalties if this language is not on the second mortgage on a residential transaction.

So that’s a balloon mortgage.  If you have any questions about it, well, give me a call at 727-847-2288.  Thank you.