Types of Mortgage


3. Balloon Mortgage

Balloon Mortgages have fixed rates and terms of 5 or 7 years. However, when the term expires, a final, large balloon payment is due to pay off the loan balance. At that point borrowers will either refinance or sell the home before this balloon becomes due.

10/1 ARM - The first number is the length of the initial period – how long it is until the first interest rate adjustment. For example, the interest rate on a 10/1 ARM will not change for the first 10 years but can change in the 11th year. People often plan to sell or refinance their home before the end of the initial period.
Balloon / reset mortgages may be a good choice for homebuyers who don't expect to own their home past the maturity date of the balloon note: 5 or 7 years. Below is an overview of balloon/reset mortgages.
Balloon / reset mortgages have monthly mortgage payments based on a 30-year amortization schedule but the entire mortgage balance becomes due at the end of the 5 or 7 year term.
However under the reset option you may be able to "reset" your mortgage interest rate at the market rate at that time for the remainder of the amortization period if :

* You are still the owner and occupant of the home.

* You have not been delinquent in your mortgage payments for a year before the maturity date of the balloon note.

* You have no other liens against the property

* You have satisfied certain other conditions of the reset

You may also qualify to refinance your balloon / reset mortgage.
You might also consider a balloon/reset mortgage if you can't afford the home you want because the monthly payment for an ARM or fixed-rate mortgage exceeds your Debt-to-Income Ratio. Balloon/reset mortgages typically come with a slightly lower initial rate than many other mortgage types.
If interest rates have increased during the term of the balloon note, when you reset or refinance your mortgage, the interest rate you pay will be at the current rate. This may be quite an increase in your monthly payments.

Types of Balloon / Reset Mortgages

There are several types of balloon / reset mortgages:
 
* 7/23 balloon / reset
* 5/25 balloon / reset

• The two numbers combined indicate the total number of years that the payments will be based on. In other words, your monthly payments will be  calculated as if the mortgage had a 30 year term.

• The first number is the number of years before the balloon maturity date and the second number is the balance of the term

• If you exercise your option to reset your balloon/reset mortgage, the reset mortgage will have a term of 23 or 25 years.

• For example, a 7/23 balloon/reset mortgage means that your payment for the first 7 years will be
  based on a 30 year amortization but at the end of the 7 years, you would need to exercise the reset option or refinance the mortgage and pay off the loan balance.
  
  
  
  

  Advantages	Disadvantages
  Lower initial monthly payment.	Risk of rates being higher at the end of the initial fixed period.
  Lower payment over a shorter period of time.	Risk of foreclosure if you cannot make balloon payment or if you cannot refinance or if you cannot exercise the conversion option.
  Many balloon mortgages offer the option to convert to a new loan after the initial term.	------------

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