Balloon mortgages are fixed
rate hybrid loans. (You may also see the terms: rollover loan,
extendable loan, or bullet loan to describe these mortgages).
How Balloon Mortgages Work
The most common balloons mortgages have a fixed rate for five or seven years with a thirty-year amortization. At the end of 5 or 7 years the mortgage has several options:
1. The loan must be paid-off:
The note provisions normally call for the new interest rate to be calculated using the current net yield for 30-year mortgages plus a margin of .375 to .875%. This calculation usually results in a new interest rate of about .25% to .50% higher than what new 30-year loans are available in the market place.There are certain conditions that must be met to take extend the loan. Typically, the conditions include:
Another loan type to review are the adjustable rate mortgages (ARMs) with initial fixed rate periods. There are a wide variety of these hybrid ARMs available offering fixed interest rate periods of 3 to 10 years.