History

• Balloon mortgages were initially introduced into lending for commercial and business purposes. The idea behind the "balloon" element is that borrowers will never reach a point at which they would need to repay the entire principal balance of the mortgage. Instead, these were initially used as short-term bridge loans that offered lower monthly payments.
  
  

How Balloon Mortgages Work

• In a conventional loan, a borrower makes a standard monthly payment for a predetermined period of time, after which the loan will be repaid in full. In a balloon mortgage, customers pay monthly payments for a predetermined period of time--which may or may not be full principal and interest payments--after which the "balloon" is due. In other words, the entire balance of the mortgage is due.
  
  

Benefits

• These loans are especially attractive to real estate speculators since they offer much lower initial monthly payments. Most balloon mortgages are amortized so that only a few years of principal and interest are calculated. Thus, investors can carry multiple balloon mortgages on multiple properties without paying huge amounts for monthly mortgage payments.
  
  

Warning

• Only those well-versed in market trends should consider balloon mortgages. In no way are these loans considered long-term financial options for homeowners. Some customers take risks with balloon mortgages--with the hope that their homes will appreciate or their financial situations will improve--only to end up losing their homes to foreclosure when they cannot make the monstrous balloon payment.
  
  

Credit Crisis 2008

• Balloon mortgages are often bundled into the subprime category when economists speak of the 2008 credit crisis. The problem is that these mortgages entered the residential market as viable homeowner loans. In the worst cases, some customers were duped into believing these loans were standard principal and interest loans, only to find out the bleak truth when the loans were called in.