What Does It Mean When a Mortgage Matures?

With a traditional loan, maturity means you've paid off your mortgage.

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Mortgage maturity refers to the date at which all agreed payments, as specified in your original mortgage paperwork, have been paid. It is also the end of the term of your loan. Depending on the length of your loan term, and the type of amortization on your mortgage, you may or may not have completely paid off the mortgage at the date of maturity.

Amortization Period

Amortization refers to the schedule of payments you are making on your loan. The most common type of mortgage is called a "fully amortized" loan. That means the amortization period matches the term of the loan. If you have a 30-year fixed mortgage loan, then both your amortization and your term are for 30 years. Each payment includes principal and interest. The mortgage will be fully paid off at maturity. Sometimes, however, the amortization period will be longer than the term. An example would be a loan that is amortized over 30 years, but matures after 10 years.

Balloon Mortgages

If your loan term is shorter than the length of your amortization, there will still be a significant amount of principal outstanding on the loan when it matures. You will be required to come up with the cash to pay off the loan, or obtain a new loan by refinancing to pay the outstanding debt. These are known as “balloon” mortgages, named for the substantial balloon payment due at maturity. Many borrowers expect to refinance when their loan matures and the balloon payment comes due, but circumstances do not always allow it. If their financial situation has changed or their home value has declined, they might not qualify for a new loan. Some lenders will try to work with their borrowers, perhaps by offering a modification or “no qualification” refinance, but even these options are often limited.

Interest-Only Loans

Some loans are not amortized at all. On an interest-only loan you pay only the interest while the principal remains the same as on the original note. Interest-only loans may have a schedule where the principal payments kick in at a certain point, or the loan may mature with the full principal balance still owed. Interest-only mortgages are occasionally written for primary home financing, but they are much more common for second mortgage loans or home equity lines of credit.

Risk and Reward

There are a number of reasons for getting a balloon mortgage or interest-only loan. The lender might offer a lower rate because of the assurance that the loan will be paid off within a set time. The low interest-only payments can also be very attractive. If you anticipate selling your home before the end of the loan term, then the low rate and payment might make sense. But there is a risk if your plans change, or if you find yourself unable to refinance. Unless you pre-pay your mortgage, you will owe your lender a significant amount when your balloon or interest-only mortgage loan reaches maturity.