A balloon mortgage, also called a reset mortgage, offers
lower interest rates with the option in 5 or 7 years to pay off the balance or
resent the loan.
Considered more risky than an ARM since interest rates can
jump significantly, it is a valid option for those expecting to move or
interest rates to drop.
Balloon payment mortgages are called such because borrowers
who are on this type of loan are usually set up for a "balloon" payment at the
end of their loan term.
In most other loans, monthly payments do not only pay
off the interest but also chip away at the principal amount - the original
amount owed. Thus at the end of each loan term where balloon payment mortgage
is applied, no money is owed.
With balloon payment mortgages however, the monthly payment
only comprises of interest or a combination of interest plus a small amount for
the principal. No matter the case, when the balloon payment mortgage term
expires, the balance is due in full.
Balloon Mortgage Features
Balloon mortgages are based on a 30 year amortization
schedule, but you only pay those payments for 5 or 7 years depending on your
loan's terms.
At the end of that period, you are required to make a balloon
payment for the rest of the principal or resent the mortgage at current
interest rates. Some financing companies also offer the option of refinancing
the home loan.
With its unique interest rate structure, you can qualify to
borrow more than a with a fixed rate mortgage. Balloon mortgages also have
interest rates lower than a traditional home loan.
Balloon Mortgage Numbers
Balloon mortgages, like ARMs, use numbers to describe terms.
The first number is the number of years until you reset the loan or make the
balloon payment. The second number equals the rest of the loan term. Together
both numbers equal the loan's amortization schedule.
So a 7/23 mortgage means that you have 7 years until the
balloon payment is due, 23 year's worth of principal. Adding the two numbers
together, your loan is amortized for 30 years.
Reset Requirements
In order to reset your loan, you have to qualify by still
occupying the home, having no liens against the property, and having made on
time monthly payments for the last year. If you don't qualify to reset the
mortgage, you may be able to still refinance the loan.
Balloon Mortgage Considerations
Balloon mortgages don't have the fluctuating interest rates
of an ARM, but they don't have the caps to safeguard against extremely high
future rates.
You may also find that due to a reverse in your financial
situation you many not qualify to reset or refinance your home, and have to
sell it to meet the balloon payment. In the end you are trading security of a fixed rate for
lower interest payments.
There are a couple of accepted institutional loan products
that have balloon payment mortgages. One of these balloon payment mortgage
products is the 30-year loan that has to be paid off in five or seven years.
Some lenders offer extensions for their 30-years-due-in-7
balloon payment mortgages. Lenders of this type of loan may extend your balloon
payment mortgage for another 23 years but with a new interest rate.
These
balloon payment lenders base their new interest rates on a conversion formula.
In this case, you might have to re-qualify for the balloon payment mortgage
should the new interest rate on the mortgage being converted is significantly
higher than the old rate.
Usually, the interest rate of the 30-year balloon payment
mortgage is lower than a normal 30-year fixed rate mortgage with due date of 30
years.
Monthly payments of balloon payment mortgage are still amortized based
on the 30-year term. But at the end of five or seven years, a large amount of
the balloon payment mortgage is due.
A tip for home borrowers is that when you do take on a
balloon payment mortgage makes sure that the due date is not too soon. With
balloon payment mortgages, if you can't pay the lender the amount on the due
date, you might have to foreclose and lose the property.
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