A balloon loan allows you to make fixed payments for a certain period of time, but then requires you to pay off the remaining balance in one lump-sum payment. Balloon mortgages usually come in the form of interest-only loans. They are attractive to homebuyers as they have very low monthly payments. But you need to be cautious if you intend to take out a balloon loan.

         Balloon loans are usually only for seven to ten years. At the end of this time you must pay the full principal. If you cannot afford the payment, you could lose your home to foreclosure. A lot of homeowners use balloon loans because they could not qualify for a traditional mortgage. If their financial status does not improve in about seven years, they stand to lose their dream homes.

          If you don’t have the money for the lump sum payment, you will be forced to refinance the loan. Refinancing will cost more in lender fees. However, there is also the risk that you won’t qualify for the loan, because of your financial status.

          Because of these issues, a balloon loan is usually not a good option. It may be a good idea if you only plan to stay in a house for five to seven years. It will save you money each month, and if you sell the house before the term ends, you'll avoid the lump sum payment. Always seek the advice of a mortgage professional before taking out a balloon loan.