Balloon Payment Loans
Understanding Balloon Loans
Balloon payment mortgage loans mean that at a certain point during the loan (5,7,10 or 15 years) there will be a "balloon" payment due ie. the remaining balance of the loan. For example: Most (not all) second mortgages are based on payments for 30 years however in year 15 they have a balloon payment due for the entire balance due at that point in time.
Balloon payment mortgage loans can provide a lower interest rate and payment with some lenders. With respect to 1st mortgage liens, these loans were more popular years ago. The real estate boom we've seen over the last 7-10 years have brought a new wave of loan products to the market. These products (Pay-Option-Arm, 5/1 Arms, 40 Year loans etc.) have replaced (for the most part) balloon payment loans on 1st mortgage liens.
For fixed 2nd mortgage liens, balloon payments still remain a strong force in the market place today. A majority of fixed rate 2nd mortgage liens are what they call 30/15. The loan is based on 30 years and in year 15 there is a balloon payment due. The likelihood a borrower would be in this loan for 15 years is minimal. In the 1950's and 60's most people who bought houses lived in them for 30 years (but even then they would refinance every so often to consolidate bills or do home improvements). The likelihood that someone would stay in the same house for more than 5-10 years has diminished greatly especially for first time home buyers.
Many balloon loans are sold in the mortgage secondary market, which are converted into mortgage backed securities. Usually, the yields on balloon loans track the maturities of other capital market debt instruments, since balloon loans are considered as short-term mortgages and can offer lower interest rates than 30 year fixed mortgages. Investors in the secondary market tend to purchase balloon loans from mortgage lenders and have helped create balloon loans with refinance options at the end of the balloon period. Occasionally, balloon loans allow borrowers to convert the mortgage at the end of the balloon period to a fully amortizing loan based upon the outstanding principal balance and the current interest rates.
Kevin O'Connor
Mortgage Consultant
www.koloans.com
800.550.5538
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