Balloon Mortgage -A mortgage that typically offers low rates for an initial period of time (usually less than 10) years, and then requires that the balance is due or is refinanced by the borrower. The loan is typically amortized as if it would be paid over a thirty year period to keep monthly payments low.
Cap--The limit on an adjustable rate mortgage that the payment or interest rate can be increased or decreased during each adjustment period (usually 6 or 12 months). Some ARMs also have a lifetime cap.

Balloon mortgages for residential homeowners were very popular in America prior to the advent of the 30 year fully amortized principal & interest mortgage, which first came into use after the creation of the Federal Housing Authority during the Roosevelt administration. While they are still used extensively in Commercial real estate finance, balloon mortgages have only recently become popular again for residential home owner mortgages. The resurgence of the balloon mortgage may be due to the introduction of long term balloon 40 year mortgages, and now 50 year mortgages, which are for the most part amortized over 40 or 50 years but due in 30 years, leaving a balloon payment for the remaining principal and interest due at 30 years. The 50 year balloon mortgage in particular is a popular alternative for borrowers seeking the low payments of an interest only mortgage but lacking the good credit generally required to obtain an Interest Only loan.

 

 ++