"Balloon loans are short term mortgages that have some characteristics in common with fixed rate mortgages. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not completely amortize over the original term. Balloon loans can have many types of maturities, but most have a term of 5 to 7 years.
If at the end of the loan term there is still a remaining principal loan balance and the mortgage company requires the loan be paid in full, this can be accomplished by refinancing. Many companies have options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on criteria such as having made your last 22 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible."
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