A balloon mortgage takes a five- to seven-year term and amortizes it over 30 years, effectively reducing the monthly payment. The downside of this strategy is that when the term comes due, you must pay off the remainder of the balance. For most, that means refinancing the loan, partly defeating the purpose of a 30-year amortization.
Before agreeing to the terms of a balloon mortgage, make sure your lender will provide refinancing at the end of the term without any conditions such as income qualification, etc. If you've made all your payments over the initial term, it's likely you will continue to do so.
Here are some reasons to explore this type of mortgage:
A common balloon is the 7 / 23 convertible mortgage. This means you pay a fixed rate for seven years based on a 30-year amortization. At the end of the term, you convert to a 23-year fixed term, adjusted to the prevailing rate at the time and amortized over 30 years. It's important to mention that some banks offer 7 / 23 balloon mortgages that convert to ARMs. This isn't a good choice for most people given the current direction of interest rates.
Although you might get a better rate than the traditional 30-year fixed mortgage, in most cases it's questionable whether the positives outweigh the negatives. Most people would be better off locking in their mortgage and working toward paying it off over time. Often, the simplest solution is the best one.