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Mortgage Products: The Balloon Note

Ever been to watch the hot-air balloon in flight? It's an absolute beautiful sight. What is the down side to the hot air balloon? Unless all the conditions are just right, the balloon can crash, causing a life-threatening situation. The balloon mortgage note, can affect the same result, you just don't fall from the sky. You fall from the home. This article takes a look at the balloon mortgage note, and the situations it benefits, and the situations it does not.

Before you can discuss how well something does or does not work, you really should understand what it is. The balloon mortgage note allows you to borrow money to purchase a home, and establish an affordable monthly payment, often with a very good interest rate. The amortization of the amount borrowed may be for a 30 year term; however the life of the balloon mortgage generally does not exceed 72 or 84 months, 6 to 7 years. At the end of the balloon term, a huge “balloon payment” is due.

If you intend to sell your home within a 7 year period, the balloon note option is an excellent alternative that offers a lower monthly payment. But, what happens if you don't sell the home? Well you either must come up with the balance of the note, or find an alternative mortgage product. The biggest problem that this situation creates is your ability to deal with the variables in the situation, when the balloon note matures.

At the time the note matures, if the interest rates are high, or if the real estate market is experiencing a slump, you may be forced to accept a higher interest rate, or produce a very big down payment with a new note. Either way, the conditions aren't favorable for the homeowner.

What is the difference between the balloon note and the Adjustable Rate mortgage? Actually, quite a lot. The balloon note, of course we have discussed above. But we'll hit the high spots once more: The balloon mortgage note allows you to borrow money to purchase a home, often with a very good interest rate; the life of the balloon mortgage generally does not exceed 6 to 7 years. At the end of the balloon term, a huge “balloon payment” is due. Well, with the ARM , your interest rate is fixed for a certain period of time, and at the end of that term, there is an agreed upon fixed rate mortgage that picks up the balance of the loan, with a previously agreed upon interest limit, and a fixed number of years. You see, with the ARM , there is more of an assurance provided to the homeowner that he or she will be eligible for a particular mortgage, with a set limit on the interest rate. Current market conditions have the put the rates for balloon notes and ARMs at the same level. So, there is really less reason to choose the balloon note.

Some of the balloon mortgages sold today, have an automatic rollover option; you need to be sure which type of balloon note you're getting, and if the automatic rollover option is in effect. The automatic rollover does create the opportunity for a guaranteed renewal on the note; however the interest rate will not be geared to benefit the homeowner. Often, the interest rate is higher, and the homeowner has a new mortgage, but at a higher interest rate.

It really pays to shop around before you consider this option, especially with the vast product offerings that are available to most homeowners; there are usually better products, with better terms than the balloon note.

Balloon notes are generally more popular with rising interest rates, simply because they offer a better rate. But so do ARMs and they have less volatility than the balloon note. Unless I was absolutely positive that the home I was purchasing would be sold in less than 5 years, I wouldn't even entertain the thought of a balloon note. I would suggest the safer alternative of the Adjustable rate mortgage.

However, balloons are more attractive, and quite popular than there more hum-drum counterparts, and they do offer more home for less money each month. Just remember, they are prone to exploding!