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A Balloon Mortgage is a loan that has a lump sum payment due at a specified
time. You make regular payment for generally a period of 5 or 7 years that
are the same, but these payment leave a balance due rather than paying off
the mortgage at the end of the loan.
Balloon mortgages have a bad name because of the large balloon payment that
is due at the end of the mortgage, but are becoming more popular with the
new convertible balloons that are available.
The best balloon mortgages are the 5/25 or 7/23 loans which have this conversion
option attached. At the end of either the 5 or 7 years you may convert this
to a fixed mortgage for the remaining 25 or 23 years at the rates that are
applicable at that time.
In addition, many of these conversion options qualify you to be able to
convert the mortgage simply if you have made all your payments on time for
the 24 months preceding that time.
The conversions generally carry only a minimal fee in the $100 to $500 range
to do the conversion, but generally you have to pay higher than the going
rate as the true fee for this conversion. Be sure to ask how much the fee
and the additional margin will be, as these vary from lender to lender.
That additional rate is typically 3/8% added to the then current rate.
Some lenders may offer a lower interest rate for the first 5 or 7 years,
but make up for it with a higher margin added to the rate. If you save 1/8%
for 5 years, but end up paying an extra 1/4% for the next 25 years for that
better rate, you can see who got the best of that deal!
Balloon mortgages are good for borrowers who intend to be moving or selling
the home within the 5 or 7 years and are better than the ARM programs which
require you to refinance in order to get a fixed rate should your plans
change and you decide to keep the home. Rates for balloon mortgage loans
are usually very similar to the 5 or 7 year ARM's
Advantages of a Balloon Mortgage
- Has fixed payments
until balloon takes effect
- Rates are lower
than on a regular fixed mortgage
- The 5/25 or 7/23
balloon mortgages offer a conversion option
- Often, no qualifying
is required to convert the loan other than making on time payments
Disadvantages of an Balloon Mortgage
- The balloon requires
a lump sum payment of the remaining balance at the time
- If using the conversion
option, rates could be higher at that time.
- You may not qualify
to refinance at the time the balloon payment is due.
Summary
A balloon mortgage has typically been a mortgage that many borrowers shy
away from due to the big payoff they will need to come up with, but with
the conversion option today, this can actually be a better mortgage than
an ARM for someone looking at possibly staying in the home after the initial
5 or 7 years.
I would actually suggest taking one of these convertible balloon mortgages
rather than a 5 or 7 year ARM is there is a good chance that you might stay
in your home. It is much cheaper to pay the conversion fee than to pay for
a refinance to get into a fixed mortgage from an ARM.
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