A balloon mortgage is distinct from other loans because it does not fully amortize over the life of the loan.
Those people who expect to stay in their current home only for a short period of time opt for a balloon mortgage.
As it comes with low monthly payments and a much lower overall cost, compared to the 20 or 30 years conventional mortgage period a balloon mortgage is paid off in a few years.
A borrower may intend to stay in his home and refinance before the balloon payment is due. He may be expecting a higher income by then, and feel confident to be able to handle a larger monthly payment.
So for example – Suppose a buyer gets a seven-year balloon mortgage to buy a home, the lender will then require him to make equal monthly payments for seven years at a fixed interest rate and the rate will definitely be lower than a traditional mortgage loan at the end of the seven years the borrower has to pay the remainder of the balance of the loan back to the lender.
The borrower can then pay in full or refinance the loan with the lender or a different lender or simply sell the house.
The interesting appeal of a balloon loan is that borrowers pay an intern for a few years and make no payment for the principle it is no wonder why many finance people also call them interest-only loans.
In a traditional loan, your monthly payments apply for the interest for the month and partial principal of the loan.
Normally you take a balloon loan structure for mortgages but is not unusual for borrowers to use this scheme for other types of large loans such as auto loans.