Balloon programs provide excellent mortgage options for home buyers planning to sell or refinance their property within a specific period of time. Balloon loans are similar to fixed rate loans in that the interest rate of the loan is set for a certain number of years, usually 5 or 7. Additionally, these short-term, fixed rate loans are usually based on a 30-year fully amortizing schedule. However, at the end of the loan term, the principal amount will be due. This amount must be paid-in-full as a single payment, often referred to as a balloon payment. This payment can be paid in a number of ways. The borrower can either make the full, lump sum payment out of their own pocket, refinance the remaining loan amount, convert the balloon mortgage to a conventional mortgage, or sell the home. The most popular balloon loans are 5/25 and 7/23 balloon mortgages.
5/25 Balloon Mortgage
With a 5/25 balloon mortgage, the monthly payments to which the borrower will be obligated will be calculated as though the loan will be paid off over a 30 year period. At the end of the 5 year period, the total balance owed on the loan will be due. Most borrowers that opt for a 5/25 balloon mortgage intend to sell or refinance their home within 5 years. A 5/25 balloon mortgage may be an excellent choice for temporarily relocated workers who know they will not live in the home beyond a 5 year period. Borrowers that opt for a 5/25 balloon mortgage will enjoy lower interest rates as lenders are only asked to extend credit to the borrower for short period of time.
7/23 Balloon Mortgage
A 7/23 balloon mortgage is similar to a 5/25 balloon mortgage except that borrowers will have two extra years before the principal amount becomes due. A 7/23 balloon mortgage will be based on a 30 year amortization schedule, and it is simply a longer version of the 5/25 balloon mortgage. A 7/23 balloon mortgage may be ideal for borrowers that do not intend to stay in the home for longer than 7 years.
Balloon mortgages usually have lower interest rates than conventional loans, and borrowers may find it easier to qualify for balloon mortgages as well. If borrowers convert the balloon mortgage at the end of the loan term, they will be subject to current interest rates. Home buyers can use mortgage calculators to help them determine if a balloon mortgage will be right for them.
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