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Balloon Mortgages
With a balloon loan, at some point you'll be
forced to pay off the loan, refinance the loan, or exercise a
conversion option to get a new loan on or before the balloon due
date. Unlike standard fixed or adjustable loans, balloon loans
are not amortized. The entire loan balance is all due and
payable in a relatively short time.
One of the most popular balloon programs is the
30/5, commonly referred to as a "thirty-year due in five." The
interest rate is fixed and the monthly payment is sufficient to
pay off the loan in thirty years, but the outstanding principal
balance is due at the end of five years. Some 30/5s have a
conversion option which allows you to convert to a twenty-five
year, fixed rate at the time the balloon becomes due. There may
be a minimal processing fee (typically $250) to convert to the
new loan. The conversion rate is normally the FNMA sixty-day
rate plus .5 percent. The conversion option may also be
conditioned upon:
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Satisfactory mortgage-payment history. If your
payments were late, the conversion may be denied.
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If the loan was secured by an owner-occupied
dwelling, the dwelling will still need to be owner-occupied.
If the house is a rental at the time of loan-conversion, the
conversion may be denied, or you might be charged a higher
interest rate.
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Secondary financing may not be allowed. If you
have a second mortgage, the conversion may be denied unless
you pay off the second mortgage.
Terms vary by lender. More information can be
found in the loan obligation (promissory note). This is a
document the lender will require you to sign at the time of
closing.
Another popular balloon loan program is the
30/7. This is similar to the 30/5 except that the balloon comes
due at the end of the seventh year. |
