With a balloon loan, at some point you’ll be forced to pay off the loan, refinance the loan, or exercise a conversion option to get a new loan on or before the balloon due date. Unlike standard fixed or adjustable loans, balloon loans are not amortized.  The entire loan balance is all due and payable in a relatively short time. 

One of the most popular balloon programs is the 30/5, commonly referred to as a “thirty-year due in five.” The interest rate is fixed and the monthly payment is sufficient to pay off the loan in thirty years, but the outstanding principal balance is due at the end of five years.  Some 30/5s have a conversion option which allows you to convert to a twenty-five year, fixed rate at the time the balloon becomes due. There may be a minimal processing fee (typically $250) to convert to the new loan. The conversion rate is normally the FNMA sixty-day rate plus .5 percent. The conversion option may also be conditioned upon:

1. Satisfactory mortgage-payment history. If your payments were late, the conversion may be denied.
2. If the loan was secured by an owner-occupied dwelling, the dwelling will still need to be owner-occupied. If the house is a rental at the time of loan-conversion, the conversion may be denied, or you might be charged a higher interest rate.
3. Secondary financing may not be allowed. If you have a second mortgage, the conversion may be denied unless you pay off the second mortgage.

Terms vary by lender. More information can be found in the loan obligation (promissory note). This is a document the lender will require you to sign at the time of closing.

Another popular balloon loan program is the 30/7. This is similar to the 30/5 except that the balloon comes due at the end of the seventh year.