Balloon Mortgages

 Select Font size A  A  A

 

Conventional balloon mortgages are fixed rate hybrid loans. You may also hear the term: rollover loan, extendable loan, 7/23, 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.

These loans are called balloons because of the balloon payment due at the end of the term.

 

Balloon Advantages:

 

  • Lower interest rates than ARMs
  • Lower payments
  • Qualify to buy a larger home

 

Balloon Disadvantages:
 

You may be uneasy with an balloon’s lower payment if:

  • you don’t think you will move before the end of the term,
  • 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:

  1. the home is still your primary residence,
  2. you have a good payment history and your payment is current, and
  3. there is not a second mortgage or equity line on the property.

 

Generally, you should consider a Balloon over an ARM when you are more confident that you will not be in the home at the end of the fixed loan term.