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BALLOONS
Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. At the end of the loan term there is still a remaining principal loan balance and the lender generally requires that the loan be paid in full. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years. Sometimes balloon loans have features that 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. Other times, balloon loans may convert to an adjustable rate mortgage at the end of the balloon period. Normally, you would consider a balloon loan if you intended to sell or refinance your home before the end of the initial period.
5 YEAR BALLOONWith a five-year balloon mortgage, you have the advantage of lower interest rates and lower monthly payments for the initial period, but must pay the complete balance of the mortgage, the balloon payment, at the end of the five-year period.
7 YEAR BALLOONWith a seven-year balloon, the remainder of the mortgage is paid at the end of the seventh year. Normally, you would consider a balloon loan if you intended to sell or refinance your home before the end of the initial period.
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