Advantages of Balloons

Balloon mortgage loans have two important elements that provide a considerable advantage to the borrower: a shorter term and a longer amortization.

The shorter term (as compared to a standard 30-year loan) means a relatively lower risk exposure for the lender and so a lower interest rate. The interest rate for a conforming five-year balloon, for example, is typically 0.500 to 1.000 percentage points less than conforming 30-year fixed-rate loans.

At the same time, the balloon loan's longer amortization (usually 30 years) provides the borrower with lower monthly payments than short-term loans, such as a 15-year mortgage. Except for the short-term, the conforming (Fannie Mae or Freddie Mac) balloon loans are very similar to the 30-year fixed-rate program.

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Real Estate 101

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