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How do they work?
In general, Balloon Mortgages have fixed rates and terms of 5 or 7 years. However, when the term expires, a final, large balloon payment is due to pay off the loan balance. At that point borrowers will either refinance or sell the home before this balloon becomes due. Some Balloon Mortgages include a conditional right to convert the Balloon Mortgage into a fixed rate mortgage for the remaining term. This is called a conversion option. The lender charges a nominal fee to convert the loan when the Balloon payment is due.