U.S. Government Printing Office
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Federal Trade Commission
Balloon mortgages have a series of equal monthly payments and a large final payment. Although there usually is a fixed interest rate, the equal payments may be for interest only. The unpaid balance, frequently the principal or the original amount you borrowed, comes due in a short period, usually 3 to 5 years.
For example, suppose you borrow $30,000 for 5 years. The interest rate is 13 %, and the monthly payments are only $325. But in this example, the payments cover interest only, and the entire principal is due at maturity -- in 5 years. That means you'll have to make 59 equal monthly payments of $325 each and a final balloon payment of $30,325. If you can't make that final payment, you'll have to refinance (if refinancing is available) or sell the property.
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Some lenders guarantee refinancing when the
balloon payment is due, although they do not guarantee a certain interest
rate. The rate could be higher than your current rate. Other lenders do
not offer automatic refinancing. Without such a guarantee, you could be
forced to start the whole business of shopping for housing money once again,
as well as paying closing costs and front end charges a second time. A balloon note may also be offered by a private seller who is continuing to carry the mortgage he or she took out when purchasing the home. It can be used as a second mortgage where you also assume the seller's first mortgage.
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