Of the three mortgage types – fixed, adjustable, and balloon (all of which I can offer you) – the most familiar is probably the fixed rate loan.
With a fixed rate loan, your mortgage payment is the same each month, excluding taxes and insurance, throughout the life of the loan.
The ARM, or adjustable rate mortgage, has an initial fixed rate period and then becomes subject to change based on whatever economic indicator it is tied to.
The third type, the balloon loan, is a little bit different from the fixed rate loan and the ARM. The rate is fixed through the balloon period, which can be between three and 10 years. That’s simple enough so far.
But there’s a twist: At the end of the balloon period, the entire remaining balance of the loan is due to the lender.
At this point, if you are still living in the property, one option is simply to refinance the loan.
So why would anybody ever want a balloon loan?
Let me explain.
Just as with other types of loans, there are pluses and minuses to a balloon mortgage.
The plus side is that you can get a balloon loan at a lower rate than you can get a traditional 30-year fixed rate loan, which means you’ll have lower payments.
The minus side is that at the end of the balloon period, when you are in the position of having to refinance, you are subject to whatever interest rates are available at that time.
The new rates could be lower or higher than what you were previously paying. Nobody knows, especially three to 10 years out.
For this reason, this is a great option to explore if you’re planning to finance a home and are absolutely sure that you are going to be out of the property before the balloon period ends.
Is this a good choice for you? Give me a call, and we can review your options.