In many respects, the balloon mortgage loan falls between the fixed-rate and the adjustable-rate mortgage (ARM) loans. The balloon loan's interest rate, for starters, is usually lower than comparable fixed-rate loans, though higher than comparable ARM programs.
The balloon program also provides a middle ground between risk and stability. Whereas the ARM loan's fluctuation in interest rate and payments means more instability for the borrower, the conforming balloon loan is fixed rate.
Thus, the balloon loan can offer a bit of the best of both worlds: a lower rate than fixed-rate programs, but more stability than ARM loans.
If a home buyer is considering a stay of only five to seven years, the balloon mortgage loan is the definite choice. It has all the stability of a 30-year fixed-rate loan (during that period) but at a lower interest rate and, consequently, payment.
Even if the home buyer plans to consider a longer stay in the property, the balloon mortgage loan can still be a wise choice. The buyer can always refinance to a standard fixed-rate loan at the end of the balloon term, as well as in some cases exercise a conversion option.
The main disadvantage of the balloon loan, as compared to the 30-year fixed-rate loan, is that conforming balloon loans typically require at least 10% down payment.
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If you are getting ready to purchase your first home or if you think you can't afford to purchase your first home, don't make another move until you have read this important information! Every year, Federal, State and Local government and community development programs help thousands of people obtain there first home.