In the mortgage biz, there are a couple of terms that  might sound a bit funny but in fact describe a particular type of home loan. These two terms, balloon and hybrid, do have similar characteristics but are slightly different from one another. So they’re not exactly the same, but pretty close.

A balloon mortgage is rarely found today, at least in its original sense. A true balloon mortgage is one where while the loan is amortized over a preset period, typically 30 years, but after a certain initial period, the entire note comes due. All of it. So someone with a balloon mortgage would enjoy slightly lower rates compared to a fully amortized fixed product, upon the end of the initial period the entire balance must be paid off. Usually this was done by refinancing the note entirely into a new one.

Balloons were rather popular during their time, primarily leading up to the 2008-2009 mortgage debacle. As rates began to rise, borrowers who needed to refinance out of their balloon mortgage found that rates had gone up to the point where they couldn’t qualify. Instead, they had to sell. So did a lot of other folks. So many so that the market was saturated and people found they owed more than what it was worth in the current marketplace. Lots of foreclosures happened. Soon, the Feds began retooling the mortgage landscape and true balloons vanished. Instead, they turned into hybrids.

Okay, so what is a hybrid? A hybrid is a mortgage where the start rate is a bit below a fully amortized one and fixed for an initial period, like a balloon. Unlike a balloon however, it would automatically morph into an adjustable rate mortgage.

A balloon would be signified by a 30-5 symbol. This means the loan was amortized over 30 years but provided an initial fixed rate for five years. After that, it’s time to replace the current mortgage or pay if off entirely. A hybrid mortgage couild read 5/1 which also means the initial term was fixed for five years but at the end of five years the loan would automatically turn into an adjustable rate which could adjust once every year for the life of the loan. Instead of the entire balance coming due after five years, the loan simply changed into an adjustable rate mortgage.