A conventional, fixed-rate mortgage with a term that is much shorter than the terms of the payments is called a Balloon Loan. For example, a mortgage with a payment schedule for a 30-year loan with a due date of three years is a Balloon Loan. This type of loan allows the bank to loan money at a fixed rate because the duration of the loan is short. Balloon Loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.

This type of financing works well with a property intended for a short hold period, such as fix-and-flip properties. The Balloon Loan can be structured to provide enough time for any repairs and renovation, while giving the lending institution security with the short term.

At the end of the loan term there is still a remaining principal loan balance and the mortgage company gererally requries that the loan be paid in full (which can be accomplished by refinancing or selling the property). Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the 30 year market rate plus 3/8 of a percent point. Your conversion can be guaranteed based on a certain criteria such as having made your last 24 payments on time. The Balloon mortgage program with the conversion option is often called a 7/23 convertible or 5/25 convertible.

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