Home Loans - Balloon Mortgages
Balloon loans are short term mortgages that have some features
of a fixed rate mortgage. The loans provide a level payment feature
during the term of the loan, but as opposed to the 30 year fixed
rate mortgage, balloon loans do not fully amortize over the original
term. Balloon loans can have many types of maturities, but most
balloons that are first mortgages have a term of 5 to 7 years.
the end of the loan term there is still a remaining principal
loan balance and the mortgage company generally requires that
the loan be paid in full, which can be accomplished by refinancing.
Many companies have other options such as a conversion feature
at the end of the term. For example, the loan may convert to a
30 year fixed loan at the thirty year market rate plus 3/8 of
a percentage point. Your conversion can be guaranteed based on
certain criteria such as having made your last 24 payments on
time. The balloon mortgage program with the conversion option
is often called a 7/23 Convertible or 5/25 Convertible.
type of mortgage, known as a balloon loan, appears at first blush
to be somewhat like a hybrid loan. The interest rate is fixed,
for example, for five, seven, or ten years. However, and this
is a big however, at the end of this time period, the entire loan
balance becomes due. In other words, you must pay off the entire
Borrowers are attracted to balloon loans for the same reason that
they are attracted to hybrid or ARM loans -- because balloon loans
start at a lower interest rate than do fixed-rate mortgages. Buyers
are sometimes seduced into such loans during high-interest-rate
periods or when they can't qualify for or afford the payments
of a traditional mortgage.
Balloon loans can blow up in your face. You may become trapped
without a mortgage if you are unable to refinance (obtain a new
mortgage to replace the old loan) when the balloon loan comes
due. You may have problems refinancing if, for example, you lose
your job, your income drops, the value of your property declines
and the appraisal comes in too low to qualify you for a new loan,
or interest rates increase and you can't qualify for a new loan
at those higher rates.
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