Balloon mortgages are still a typical fixed rate mortgage but they differ in one major way from normal everyday mortgages. Balloon mortgages offer a lower rate leading to lower monthly payments, but the balloon term comes from a large “balloon” lump sum that needs to be paid within a certain amount of time (usually around 7 years). If you opt to take out a Balloon loan and can’t repay the amount specified within 7 years you would need to refinance the mortgage.

The balloon mortgage agreement works well if you plan on selling your home within the seven year time period. Because you will then have the money to pay off the balloon payment, you will have saved yourself money in the process by paying the lower mortgage payments.

Unless you are certain you are going to be out of the home within a 7 year period a balloon mortgage does not prove to be helpful. The idea of paying off the house after 7 years can prove very stressful on someone’s financial situation and can hurt a person’s credit if they cannot afford to pay the loan off. However if you plan on selling within a few years this type mortgage can prove to be a very helpful option.

If you are not sure whether you will stay in your home or move within the fixed frame you should probably stick with an ARM (Adjustable Rate Mortgage). This provides you with a low rate and the ability to save money in the long term. A balloon rate definitely increases the mortgage rate after 7 years if the large lump sum is not paid.