What is a balloon mortgage?

A balloon mortgage is a loan that requires one large payment at the end of the loan term. The loan term is usually shorter compared to other types of mortgages, ranging from three to seven years. In the meantime, the borrower makes smaller monthly payments of principal and interest. In Washington, the Washington State Department of Financial Institutions regulates balloon mortgages. To qualify for a balloon mortgage, the borrower must meet various conditions such as having an adequate source of income, a good credit history, and sufficient equity in the property. In Washington, balloon mortgages carry additional risks compared to other mortgagess. One of these is that the borrower may not have the funds available to repay the loan when the balloon payment is due. Another is that since the loan term is short, the borrower may not realize the benefit of refinancing their loan at a lower interest rate. Finally, since balloon mortgages have higher interest rates, monthly payments may be more expensive than other mortgages. For this reason, borrowers should carefully evaluate their options and consider other types of mortgages before taking out a balloon mortgage.

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