Balloon MortgageThus, when the term of the loan expires, a significant part of the principal of the loan is still unpaid and needs to be paid as a lump sum by the borrower (hence the term balloon payment). For example, consider a balloon mortgage with a term of 10 years and monthly installments that would repay the full loan amount in 20 years. So when the loan term expires at the end of the 10th year, the remaining balance on the mortgage will be significant and will need to be repaid by the borrower as a lump sum.
However, the investor will have to pay a higher interest rate for securing such loans since the lender is taking a higher risk by allowing for lower periodic payments for the whole term of the loan. A balloon mortgage may be appropriate for short-term and medium-term investment strategies in which there is a very high degree of confidence that by the end of the planned holding period the property will increase significantly in value and will have produced high income and appreciation returns to compensate for the higher interest rate that the investor will have to pay for securing this type of financing.
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