A balloon mortgage is one that does not fully amortize and leaves a residual amount that is to be paid at the end of the term. This amount is usually very big and thus the name balloon mortgage. Such types of mortgages are common in commercial real estates compared to residential real estates. The final payment is called the balloon payment because of its size.

• An example of a balloon mortgage would be one that is made available by Fannie Mae in the United States; the seven year Fannie Mae balloon mortgage is one which has a thirty year amortization schedule. Since borrowers may not have liquid capital available to pay the balloon mortgage it may be converted to a two step mortgage to make it easier to repay.
• In order to qualify for the two step program it is important to fulfill certain criteria. The borrower should not have any 30 day late payments in the past 12 months, should not have any other liens against the property, and he or she should be the occupant or owner of the property. Therefore the two step program is not automatic and is only applicable to borrowers who meet the above mentioned criteria.
• If there is no option of a two step program or “reset” as it is called then the owner or borrower may have to refinance the property. This means that the debtor has to go for a second mortgage which in turn presents a refinance risk. Another final option for the borrower is to sell the property and fulfill the terms of contract.
• Balloon mortgages are sometimes confused with adjustable rate mortgages; however the difference is that the latter does not required refinancing. On the other hand, balloon mortgages can be refinanced. In some countries it is illegal to offer balloon mortgages to residential property owners. Moreover the lender is obligated to continue the loan where the reset option is required. This means that the borrower faces reduced risk of being refused by the lender for refinancing the loan.

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