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Balloon Mortgages

For the same reasons that ARMs make sense, the Balloon mortgage was created. Balloon loan payments are calculated on a 30 year term, but are due in full at the end of a predetermined period. If you have a five year balloon the entire amount will be due in five years. If you have a reset option, you may be able to adjust the rate to the current market rates. If you have a 5 year balloon with a reset option, your new rate would be the rates at the market and the term would be a remaining 25 year term.

Conditions to qualify to reset after the initial term could be:

•	You, the owner, will need to occupy the home
•	Your payments have been current in the previous year prior to reset
•	The balloon loan is the only mortgage loan on the property
•	Any other conditions the lender may require

Balloon/Reset loans usually carry a lower rate than other loan products. This is due to the fact that the lender will assess your payment history and require payment in full or reset at the market thus allowing the lender to manage their rates and to discard the non-performing loans.

The draw back to this loan is if rates increase during the initial loan period, when you reset the rate it will be at the market or higher rate. You may want to remain in the home and can see rates increasing, there is no prepayment penalty allowing you to refinance. Keep in mind at the reset time, the lender will be charging much less than what you would pay if you refinance.
Types of Balloon/Reset Mortgages

A number of balloon/reset loans are available, listed below are the most popular:

7/23 balloon/reset
5/25 balloon/reset

Knowing the facts can save you money:

•	The combined numbers tell you term of the loan
•	The 7 or 5 as noted above is the number of years until the balloon/reset will remain fixed and the 23 or 25 is the balance at the reset rate or market rate.
•	The majority of balloon/reset mortgages are for a 30 year term. A unique feature for this loan is if you reduce the loan balance during the initial period, when the loan is reset, the lower balance will be used with the current rate to calculate the new payment at the reduced term.

Next: Downpayment

Balloon/Reset Mortgage:
A mortgage with monthly payments based on a 30-year amortization schedule and the unpaid principal balance due in a lump sum payment at the end of a specific period (usually 5 or 7 years) earlier than 30 years. The mortgage contains an option to reset the interest rate to the current market rate and to extend the maturity date provided certain conditions are satisfied.