Other Mortgage Packages
There are a few additional mortgage loan types that you may be offered: balloon loans, the Freddie Mac “Reset” and the Fannie
Mae “Two-Step” ARM, and 3/1 ARM (also the 5/1, 7/1, and 10/1 ARMs). All of these loans have one feature in common: For the first few years, their rates and payments are fixed. After the initial period of three, five, seven, or ten years, their rates and payments change, but in a different way for each type of loan.
Advantages. Each of these loan types starts at a lower rate and monthly payment than a 30-year fixed-rate loan. The interest rate for these loans is typically 0.5 percent lower than a comparable 30- year fixed-rate loan and the monthly payment is also lower. This makes it easier for you to qualify, and it makes the loan payment more affordable in the critical first few years of the loan. When compared with a normal ARM, these loans provide a longer initial period of stable rates and monthly payments.
Disadvantages. After the initial period of fixed rate and payments, the new rates and payments are uncertain. Some of the loans have caps to protect consumers from "payment shock.” The balloon loans and some of the others have no protection.
A balloon loan is just like a traditional 30-year fixed-rate loan, with one major exception; at the end of five, seven, or ten years (depending on the balloon term), the loan becomes due and payable. A balloon loan amortizes just like a traditional fixed-rate loan. A $100,000 7.5-percent, seven-year balloon loan with 30-year amortization requires 83 principal and interest payments of $699-21 and a final payment of $91,958.51.
When it matures, you must pay it off in cash or refinance. Some balloon loans, but not all, require your lender to refinance the loan when it matures at the then current interest rates, assuming that you qualify for the new loan. You have to pay closing costs again, and you may be required to provide all of the income, employment, and debt information that you supplied when you first applied for your loan. If you choose a balloon loan, be sure that you read and fully understand the conditions of your right to refinance.
Under what circumstances should you choose a balloon loan over a 30-year fixed-rate loan? The answer is when you kno w for certain that you will be selling your home or refinancing before your balloon loan matures. Even if you are sure that you will be selling or refinancing before your loan matures, try to find a balloon that requires your lender to refinance your loan just in case your plans change.