The balloon mortgage loan is an installment note whose amortization is longer than its term. Simply, the payments are calculated for a long-term period, but the loan’s actual life is relatively short-term—with the “balloon” mortgage balance due at the end of that short term.
The balloon loan used to be one of the chielf alternatives to the fixed-rate program, because it offered lower rates without the increased risk of the ARM loan. With the evolution of the 3/1, 5/1 and other Two-Step ARM programs, the balloon program is regularly ignored by most homebuyers and homeowners. However, it is still widely used for commercial and non-conforming loans.
The most common types of residential balloon mortgage loans are the five-year and seven-year balloons for conforming loan programs. However, 10-year and 15-year balloons are also prevalent among non-conforming programs. The majority of commercial and apartment building loans today are balloon loans.