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Balloon/Reset
Morgages
Balloon/reset morgages have monthly
morgage payments based on a 30-year amortization schedule, and
you have a choice at the end of the 5- or 7-year term to either
pay off the remaining balance or reset the morgage. So you have
the advantage of a low monthly payment, like someone with a 30-year
loan, but you must pay off the loan at the end of the specified
term.
Many balloon morgages have a
"reset" option. That means you can reset the interest
rate of your morgage to the current market rate for the remainder
of the amortization period. This option is typically only available
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- You're still the owner and occupant
of the home.
- You've paid your morgage on
time for at least a year prior to the balloon note maturity date.
- You have no other liens against
the property.
- If you do not qualify for a
reset, you may qualify to refinance your balloon/reset morgage.
There are additional considerations
to be aware of with balloon/reset morgages:
- If you plan to sell your home
before the balloon maturity date of the balloon/reset morgage,
this type of morgage, like an ARM, may be a good option.
- Balloon/reset morgages usually
come with a slightly lower initial rate than most other fixed-rate
morgage types. You may qualify for a larger loan amount with
a balloon/reset morgage than you would with a fixed-rate morgage.
Unlike ARMs, whose interest rates may reset or adjust a number
of times over the loan's life, a balloon morgage comes with only
adjustment. However, if interest rates rise sharply during the
term of the balloon loan, you could face a large increase in
your monthly payments when you reset or refinance your morgage.
- If your financial condition
has changed at the end of the balloon term because of a decline
in income, family medical problem, etc., you may have difficulty
refinancing into an acceptable new morgage.
What the numbers mean. There are 2 types of balloon/reset morgages:
7/23 and 5/25. The two numbers together are the total number
of years (30) the payments will be based on. The 1st number (7
or 5) is the number of years before the balloon maturity date.
The 2nd number (23 or 25) is the balance of the term.
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