What is a balloon mortgage?

A balloon mortgage is a type of mortgage loan that is used in the state of Virginia. It is a loan that is typically taken out for a shorter period of time, usually five to seven years, and which requires the borrower to make only interest payments during that time. At the end of the loan term, a large, lump-sum “balloon” payment must be made. The amount of this last payment is usually much larger than the earlier payments, and doesn’t include any of the principal amount of the loan. The main benefit of a balloon mortgage is that the payments are much lower than with a traditional mortgage loan. This makes a balloon mortgage attractive for borrowers who can’t afford a large down payment, or who need a larger loan amount than a traditional mortgage would provide. The downside is that if the borrower is unable to make the final balloon payment, then they risk defaulting on the loan, and losing their home. In Virginia, all balloon mortgage loans must include a “due-on-sale clause” which gives the lender the right to require the balance of the loan to be paid in full upon transfer of title to the property. Additionally, Virginia law requires that a borrower must receive specific disclosures from the lender before signing a balloon mortgage, such as the amount of the balloon payment and a statement that the loan payments do not cover the principal amount of the loan.

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What is a balloon mortgage?

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