A balloon mortgage, which is also called a reset mortgage, has lower interest rates and lets you pay off the balance or send the loan back in 5 or 7 years. Since interest rates can change a lot, it is considered riskier than an ARM. However, it is a good choice for people who plan to move or who think interest rates will go down.
Features of a Balloon Mortgage
The amortisation schedule for a balloon mortgage is 30 years, but you only make payments for 5 or 7 years, depending on the terms of your loan. At the end of that time, you must make a balloon payment for the rest of the principal or pay off the mortgage at the current interest rate. Some companies also let you change the terms of your home loan.
Because of the way its interest rates are set up, a variable rate mortgage lets you borrow more than a fixed rate mortgage. The interest rates on balloon mortgages are also lower than the rates on traditional home loans.
Numbers for Balloon Mortgage
As with ARMs, numbers are used to describe the terms of a balloon mortgage. The first number shows how many years are left until the loan is paid off or the balloon payment is made. The second number is the amount of time left on the loan. When you add the two numbers together, you get the loan's amortisation schedule.
So, a 7/23 mortgage means that the balloon payment is due in 7 years, but the principal is paid over 23 years. When you add the two numbers, you get 30 years. This is how long your loan will be paid off.
Reset Requirements
To be able to reset your loan, you must still live in the home, have no liens on it, and have made your monthly payments on time for the last year. If you don't meet the requirements to reset your mortgage, you may still be able to refinance it.
Thoughts on Balloon Mortgage
Balloon mortgages don't have interest rates that change like an ARM, but they also don't have caps to protect against future rates that are too high. You may also find that your finances have changed in a way that keeps you from being able to reset or refinance your mortgage. If this happens, you may have to sell your home to pay the balloon payment. In the end, you give up the security of a fixed interest rate in exchange for lower interest payments.
