What is a balloon mortgage and is it right for you?

Balloon mortgages are short-term home loans that allow borrowers to make small monthly payments — or no payments at all — for several years. After that initial period is over, though, the remaining balance is due in one lump sum.

There are circumstances where a balloon mortgage is appealing, but they come with significant risk to both the borrower and the lender. Because of that, it can be difficult to find a lender willing to finance a balloon mortgage.

Here's what you need to know about balloon mortgages, including what they are, benefits and drawbacks and whether or not they're right for you. 

• What is a balloon mortgage and how does it work?
• Types of balloon mortgages
• Pros and cons of a balloon mortgage
• Who are balloon mortgages for?
• Other mortgage options
• Bottom line

Unlike traditional 15-year or 30-year mortgages, balloon mortgages have much shorter loan terms, typically just five to seven years.

In most cases, borrowers make small fixed monthly payments, though in some cases no payment is required at all. The catch, however, is that when the initial period is over, you have to make a "balloon" payment — one large installment that covers the remaining balance and any fees

There are three common types of balloon mortgages.  

No-payment balloon mortgage 

With a no-payment balloon mortgage, the borrower typically doesn't need to make a payment for a short period, usually five or seven years, though interest continues to accrue. After that, they must pay the full amount due, plus any interest.

Interest-only balloon mortgage

An interest-only balloon mortgage means the borrower makes monthly payments only on the interest their loan is accruing. At the end of the loan term, they just have to pay back the principal.

Borrowers tend to build equity on their house more slowly with this type of balloon mortgage.

Balloon payment mortgage

With a balloon payment mortgage, borrowers are responsible for paying the interest on a 15- or 30-year mortgage over a much shorter timeframe, typically five or seven years.

What kind of buyer would a balloon mortgage make sense for? Borrowers who:

• Already have the full payment.
• Plan to sell the home.
• Expect an inheritance or income increase.
• Expect to refinance their mortgage during the loan period.

Since none of these scenarios are guaranteed, there is significant risk involved.

Balloon mortgages have their benefits, as well as many pitfalls. With so much risk, it's important to talk with a financial advisor before deciding if balloon mortgages are right for you.

Pros

• Funds that would otherwise go toward larger initial payments can accrue interest.
• You may get the loan faster than with a traditional mortgage.
• Lenders may be more willing to finance borrowers who don't have good credit.
• You may be able to avoid taking out private mortgage insurance.

Cons

• There's more risk you'll default.
• It's harder to get refinancing.
• If you're only paying interest, you're not building home equity.

If you're wary of such a risky proposition, there are other ways for nontraditional borrowers to finance their home purchase. Rocket Mortgage is CNBC's top pick for homebuyers with low credit scores: While a 620 is required for most home loans, Rocket considers applicants with scores as low as 580.

The company offers mortgages as low as 3.5% down and applicants can get pre-qualified online in minutes.

Awarded CNBC Select's best mortgage for saving money, SoFi offers up to $9,500 in cash back if you buy your home through the SoFi Real Estate Center. 

You can get a mortgage with as little as 3% down and a 0.25% discount is available for signing a 30-year mortgage.

Because they're shorter than traditional home loans and require a big lump payment, Balloon mortgages are riskier than typical home financing options. Buyers counting on a change in fortune or to flip the property may want to consider a balloon mortgage, but they should explore other options first.

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