Conventional Balloon Mortgages
Conventional balloon mortgages are fixed rate hybrid loans. (You may also see the terms: rollover loan, extendable loan, 723, 7/23, 525, 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.

Balloon Advantages: you’ll float away with a lower payment
  • Lower interest rates
  • Lower payments
  • Qualify to buy a larger home
Balloon Disadvantages: fear of the unknown
You may be uneasy with an balloon’s lower payment if:
  • you don’t think you will buy a move-up home; or
  • 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.
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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.
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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.

Another loan type to review are adjustable rate mortgages (ARMs) with initial fixed rate periods. There are a wide variety of these hybrid ARMs available offering fixed interest rate periods of 3 to ten years.

For more information on balloon mortgages call Home Mortgage.
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