| Another name for a balloon loan is called a bullet loan. | | | | five or seven years has a greater risk on the balloon. |
| It is a special category of loan with a term of | | | | At the prevailing market rate, the balloon should be |
| between three and seven years whose payments | | | | refinanced, whereas rate caps can limit a rate |
| are calculated on a fifteen years term with the | | | | increase on most five- and seven-year ARM. |
| balance being ready in one large payment when a | | | | A five- or seven-year balloons obtained by borrowers |
| loan term ends. In other words, your payments will | | | | can incur refinancing cost at term, as compared to |
| be much lower than for a regular mortgage, but be | | | | borrowers with 5/1 or 7/1 ARMs, who don't unless |
| sure you are ready to pay off the balance. This can | | | | they elect to refinance. It will be very difficult for |
| be done by refinancing or with cash, or by converting | | | | borrowers having payment problems to refinance |
| the loan at the current interest rates to a regular | | | | balloons. Lenders are allowed to decline to refinance |
| mortgage. Although the loan contract demands that | | | | according to the contract if in the prior year the |
| lenders should always refinance at the borrowers | | | | borrower has missed a single payment. With ARMs, |
| request, it depends on many conditions and | | | | this is not a problem, which cannot be refinanced. It |
| refinancing or if you are converting the loan then you | | | | will also be difficult for borrowers to refinance |
| require settlement costs and additional paperwork. | | | | balloons if the interest rates have spiked. Lenders are |
| A balloon loan is usually used by many people when | | | | allowed to decline in order to refinance according to |
| they are expecting a major influx of cash in the | | | | the balloon contract if the prevailing market rates are |
| future, or when they are refinancing, in the case of | | | | more than 5% higher than the rate on the balloon. |
| inheritance or settlement. it is important to compare | | | | When one signs up for either a flexible adjustable |
| flexible adjustable rate mortgage with five and seven | | | | rate mortgage or a balloon mortgage, he or she |
| year balloons that have the same initial rate periods. | | | | would not know what the interest rate will be on the |
| Both of them can offer a rate below that, which is | | | | due date. You may at least know what the upper |
| available on a fixed rate mortgage in the early years, | | | | limit will be with an ARM. This is because there are |
| and can both carry a risk with higher rates later on. | | | | built-in controls on most ARMs thereby limiting in one |
| There are also some important differences. Favoring | | | | year how high the interest rate can jump, and how |
| the Balloon: Balloon loans are easier to shop for, | | | | high the total interest rate can climb over the life of |
| because they are much simpler to understand. A five | | | | the loan. While some ARMs can adjust several times, |
| or seven-year interest rate on balloon is much lower | | | | others can adjust only once, on the anniversary of |
| than that on a 5/1 or 7/1 ARM. | | | | the loan. |
| Favoring the ARM: A substantial rate increase after | | | | |