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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:
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.
