A balloon mortgage is a type of fixed-rate mortgage loan in which the principal and
interest payments are amortized over a longer period (30 years) than the actual term of
the mortgage. For example, a 7-year balloon mortgage has a term of 7 years, but the
payments are calculated as if the term of the loan was 30 years.
At the end of the balloon period, you must pay off the outstanding balance with a lump-
sum payment or may be able to refinance for the remaining term of 23 years. The option
to refinance is conditional, meaning you have to meet certain conditions (as described
below).
Loan Features
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The refinance option is not automatic: you must exercise it by making a written
request
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You generally must occupy the property as a principal residence or second home
(some exceptions may apply).
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Refinancing conditions may include payment of closing costs and a lender fee, as
well as no 30-day late payments in the previous 12 months and no other liens
against your property except for taxes and special assessments not yet due and
payable (some exceptions may apply).
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Generally, no need to re-qualify when refinancing at the end of 7 years, as long as
the new interest rate is not more than 5 percentage points above the loan’s original
interest rate.
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Available for conventional fixed-rate, first mortgages, including the purchase of a
principal residence, second home or investment property (some restrictions may
apply).
Considerations
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The interest rate on a balloon mortgage may be lower than the interest rate on a
comparable 30-year fixed-rate mortgage.
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You will be responsible for paying off or refinancing the full amount of the
outstanding loan balance at the end of the loan term (when the “balloon payment”
becomes due).
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May be a good choice if you plan to sell or refinance your home within 7 years and
you want a relatively low monthly payment during that time.
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The refinance option may provide a "safety net" if a planned relocation does not take
place or economic conditions prevent you from moving to a larger home (as long as
you meet all of the required conditions needed to exercise the refinance option).
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