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Balloon Mortgage

A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.

Balloon loans are very common with lot loans also. Lenders generally want you to build on your lot sooner than later and this is one reason why balloons are so common with lot loans. This will give you some incentive to start building on the lot, hopefully before the balloon term is up.

These can be ideal if you think you will be selling or refinancing your home in five to seven years and want a low monthly payment during that time. It would be prudent to make sure that you ask your loan officer that you will be able to refinance either before or at the time the balloon is due, and what conditions may apply. If you have concerns about meeting the refinance conditions or if you think the balloon term will be due prior to you being ready to refinance or move, then the balloon mortgage may not be your best option.

Balloon mortgages are most popular with 2nd mortgage notes, such as a 30 year amortized note due in 15 years (30/15). With the creation of the 40 year mortgage recently, 40 year notes due in 30 years has surfaced as a viable option for home owners on 1st mortgages.

The nice thing about balloon mortgages is that the large balloon payment due at the end of the loan's term can either paid OR if you prefer not pay it, the balloon payment can be refinanced at that time into a very low monthly payment. This enables a savvy buyer to pay very low monthly payments for the term of the original loan and potentially even lower monthly payments after refinancing the balloon at the end.

Most commercial properties are financed with Balloon loans. Since Balloon loans are amortized over a longer period than they are due, they require lower monthly payments than their fully amortization counterparts. For income producing commercial property owners, loan programs with low monthly payments are most preferred.

There are also some lenders who offer extendable balloon options. What this means is that they may offer you an opportunity to extend your loan past the balloon term and lock in your interest rate for the remainder of the time left on the mortgage. You interest rate will be higher than the balloon interest rate and will be based on the interest rates at that time, usually plus a little bit too. There are other requirements that need to be met as well and you may incur some charges also. Look through your lenders guidelines or ask your mortgage professional if you balloon loan has an extendable option. An example of this type of extendable balloon would be: 30/7 extendable balloon. This means you have a mortgage that has payments that are based on a 30 year amortization term and a balloon that is due in 7 years from the date of inception. At the end of 7 years you will have the option to pay off the remaining balance in full, refinance your mortgage for the balance remaining, OR stick with this mortgage and relock your interest rate in for the remaining 23 years based on the rates at that time (plus say a .5% for this example) plus some closing costs and paperwork for the new loan terms. Remember you will still need to qualify for this option. Consult a mortgage broker if you have further questions about how this works.

You can refinance your balloon mortgage prior to its maturity and obtain a new fully amortizing loan.

Balloon mortgages are expressed in numerical terms such as a 30 due in 15 or a 20 due in 5, etc. The first number refers to the length of the amortization schedule and the "due in" refers to when the balloon balance becomes due.

A mortgage loan that mandates the outstanding principal balance be paid at a certain point in time. For example, a loan can be amortized as if it would be paid over 30 years, but it actually must be paid at the end of the tenth year.

Balloon loans are a good product for people looking for a lower rate.

Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.

At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

Remember that lending criteria can change over time so that, in 7 years or whenever the balloon might be due, the criteria for refinancing might be more stringent, thereby making it more difficult for you to do the refi. Lenders offer lower rates for balloon loans because their risk is lower. Essentially, some of the risk is being transferred to you, the borrower in return for that lower rate.

For more information regarding this topic, please call Mike Williams at 516-921-9000 or email mwilliams@northshorefunding.com.