Balloon Mortgages
Conventional balloon mortgages are fixed rate hybrid loans. (You
may also see the terms: rollover loan, extendable loan, 723,
7/23, 525, or 5/25 to describe these loans).
The most popular balloon mortgages have a fixed rate period of
either five or seven years with a thirty-year amortization and no
pre-payment penalty. The interest rate for these loans will be
lower than the rates on standard 30-year fixed rate loans.
Balloon Advantages: you will float away with a
lower payment.
- Lower interest rates
- Lower payments
- Qualify to buy a larger home
Balloon Disadvantages: fear of the unknown
You may be uneasy with a balloon's lower payment if:
- you don't think you will buy a move-up home; or
- you don't think you will have an opportunity to lower
your interest rate through refinancing or
- you will continually worry about the end of the fixed rate
period.
How Balloon Mortgages Work
The most popular balloons for first mortgages have a fixed rate
for five or seven years with a thirty-year amortization. At the
end of 7 or 5 years the mortgage has several options:
1. The loan may be paid-off:
- by refinancing the loan or
- by selling the home to buy a new home.
2. Another option includes extending the loan for the remaining
term. When >the loan is extended, the interest rate is
adjusted according to the original mortgage note provisions. Then
the rate remains fixed for the rest of the loan term.
The note provisions normally call for the new interest rate to
be calculated using the current net yield for 30-year mortgages
plus a margin of .375 to .875%. This calculation usually results
in a new interest rate of about .25% to .50% higher than what new
30-year loans are available in the market place.
There are certain conditions that must be met to take extend the
loan. Typically, the conditions include:
- The home is still your primary residence,
- You have a good payment history and your payment is current,
and
- There is not a second mortgage or equity line on the
property.
Other loan types to review are: |
