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Balloon/Reset
Mortgages
Balloon/reset mortgages have
monthly mortgage 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 mortgage. 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 mortgages have a
"reset" option. That means you can reset the interest
rate of your mortgage to the current market rate for the remainder
of the amortization period. This option is typically only available
if:
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- You're still the owner and occupant
of the home.
- You've paid your mortgage 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 mortgage.
There are additional considerations
to be aware of with balloon/reset mortgages:
- If you plan to sell your home
before the balloon maturity date of the balloon/reset mortgage,
this type of mortgage, like an ARM, may be a good option.
- Balloon/reset mortgages usually
come with a slightly lower initial rate than most other fixed-rate
mortgage types. You may qualify for a larger loan amount with
a balloon/reset mortgage than you would with a fixed-rate mortgage.
Unlike ARMs, whose interest rates may reset or adjust a number
of times over the loan's life, a balloon mortgage 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 mortgage.
- 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 mortgage.
What the numbers mean. There are 2 types of balloon/reset mortgages:
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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