Archive for the 'Balloon Mortgages' Category (Chronologically Listed)

Non-Traditional Mortgages: Pros & Cons

We’ve talked about many of these mortgage products at length, but below is a brief breakdown of some of the most common home loan financing products and how they differ from one another. Especially in this lending climate, you can’t be too careful. Read up.

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FIXED-RATE MORTGAGE

Overview: A mortgage with payments that remain the same throughout the life of the loan, because the interest rate and other terms do not change.

Advantages: Predictable payment, you know you will not suffer when interest rates rise.

Disadvantages: An initial interest rate that will be higher than an ARM, as will the mortgage payment itself; no benefit when market rates fall.

ADJUSTABLE-RATE MORTGAGE

Overview: A mortgage loan subject to changes in interest rates; traditional ARMs typically have a fixed period with adjustable period afterwards. That period is generally made up of either 1, 3, 5, 7 or 10 years.

Advantages: Low initial interest rate compared with a fixed-rate mortgage, payments go down when market rates fall.

Disadvantages: No stability, payments change over time, payments increase when home loan rates rise.

BALLOON MORTGAGE

Overview: A balloon mortgage is a loan that typically offers low rates for a short period of time (usually 5, 7, or 10 years); after that, the balance must be paid off or refinanced.

Advantages: Lower rates than fixed-rate mortgages.

Disadvantages: Will need to pay off in short time period, may need to apply for a mortgage refinance at a higher rate than you’d like.

INTEREST-ONLY MORTGAGE

Overview: A mortgage that allows the borrower to pay only on the interest during the first few years of the loan (this model can be either fixed or adjustable rate).

Advantages: Low monthly payments.

Disadvantages: Initial payments do not reduce the principal on the loan.

PIGGYBACK MORTGAGE (or 80/20 LOAN)

Overview: Two loans taken out at once, with the smaller, second mortgage loan usually obtained at a higher rate.

Advantages: Eliminates mortgage insurance (PMI) on the monthly payment, which would be required of you if you did not make 20 percent of the purchase price as a down payment.

Disadvantages: In some cases, the total monthly home loan payment can be higher than with a 100 percent loan plus PMI.

OPTION ARM

Overview: Special adjustable-rate mortgages that allow the borrower to pay a credit card-like minimum payment that is actually less than the interest owed.

Advantages: Flexibility, low monthly payments.

Disadvantages: Possible negative amortization - your debt increases instead of decreases over time, somewhat defeating the purpose of home ownership.

SOURCE: The News-Journal




Posted by Richard Barber on Mar 12 2007 under Adjustable-Rate Mortgages, Balloon Mortgages, Fixed-Rate Mortgages, Interest-Only Mortgages, Mortgage Advice, Piggyback Mortgage





What is a Balloon Mortgage? Is It Right For You?

While potentially risky, a balloon mortgage is a short-term loan that offers reduced initial monthly payments - and typically a lower interest rate - than many traditional fixed-rate mortgage products.
The name is derived from the way the loan is set up: at the end of the term, your monthly payment “balloons” to include payment of the outstanding principal.

Basic features of a balloon mortgage
Most balloon mortgages have a term of either five or seven years, but are amortized over 30 years. This means the amount of your monthly payment is based upon a schedule that would require you to make continuous monthly payments for 30 years in order to pay off this type of bad credit home loan.

However, because the term of the loan is so much shorter than this, you’re left owing an outstanding balance. Usually, this amount must be paid off through mortgage refinancing or the selling of your residence. For example:


Term: 5-year balloon mortgage
Principal: $200,000
Interest rate: 6.5%
Monthly payment: $1,264.14
Remaining balance at end of 5-year term: $187,222

VERSUS

Term: 30-year fixed-rate mortgage
Principal: $200,000
Interest rate: 7%*
Monthly payment: $1,330.60
Remaining balance at end of 30-year term: Nil

Potential risk of a balloon mortgage
Because a balloon mortgage does very little to pay down your principal, it’s not an effective way to build equity in your home. It also may not be the best solution if you plan to stay in your home and refinance to a traditional mortgage at the end of its term, as this will likely result in a sudden increase in your monthly payments.

Also, be wary: If you’re unable to afford the higher payments, you may be forced to sell your home or risk foreclosure.

Balloon/reset mortgages
Some balloon mortgages also offer a conversion/reset option that enables you to extend the term of the mortgage at the current home mortgage rate. This may, however, involve re-qualifying if interest rates have risen substantially since you first took out the loan.

Speak with our brokers to learn more today and determine whether or not this option is right for you.




Posted by Jed Moss on Nov 16 2006 under Balloon Mortgages, Mortgage Advice