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 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.
