loan type: Balloons and Other Mortgages
Your monthly payments are based on any fixed term up to 30 or 15 years amortization. At the end of the balloon period, your remaining mortgage loan amount will come due.
Other mortgage loans include zero-down payments, pledge assets, buy-downs and graduated mortgage plans.
Many lenders offer 3- and 5- and 7-year balloon periods with attractive low interest rates.
A Balloon Mortgage means that your monthly payments are based on any fixed term up to 30 or 15 years amortization. At the end of the balloon period, your remaining mortgage loan amount will come due.
Balloon mortgages are popular with people whose income is prone to fluctuate or who are not planning to stay in their home for more than 3, 5 or 7 years. It offers the security of a Fixed Rate Mortgage but at a lower rate.
When you balance comes due,
most lenders offer the option to refinance at a new rate and term if you are unable to payoff the mortgage. Many balloon mortgage holders will choose to refinance their mortgage.
Advantages / Disadvantages:
- Balloon loans come with lower rates
- But the homebuyer runs the risk of being
in the home longer than the balloon
period thus forcing them to
refinance (which could be be costly)
- More attractive loans with similar rate advantages but with lower risk are Hybrids 3/1, 5/1, 7/1 loans
Zero Down Payment Mortgages
The Zero Down Payment Mortgage allows the donor to deposit the cash gift
into an interest-bearing account as collateral for the zero-down payment. The gift money keeps earning interest and it allows the first-time home buyer to purchase their first home with zero-down. It also allows many families to help young people get started on home ownership with a gift that usually goes towards the down payment.
The zero-down mortgage may vary from fixed-rate and ARMs.
Zero-Down Payment Mortgages are restricted in certain states.
Advantages / Disadvantages:
- Zero-downs can help new home buyers
get into their home with help from
family or other parties
- Donors who donate the funds can
earn interest on the money while the
money remains in the home as the down payment
- Major drawback is in the event that
the home owner default on the mortgage,
the donor will lose their investment.
- Likewise, the investment remains tied in the home at relatively low rates of return when compared to other investments.
Referred to as asset-backed mortgages:
Targeted to buyers with sufficient income who want to pledge their investments as collateral instead of a making a cash down payment. Pledged assets may include investments, CDs, mutual funds, stock portfolios, and investment property.
Generally, pledged assets are maintained in a collateral account maintained by the lender.
Pledged assets can be used for other family members, such as Zero-Down mortgage programs.
Pledged assets will remain as investment instruments, respectively gaining market value for the homeowner. However in most cases, the homeowner will not be able to sale or change the investment strategy without approval by the lender.
Homeowners should calculate the investment difference
Between the higher interest rate charges for pledge-asset mortgages and the investment potential gain of the pledge asset. There are disadvantages. If the homeowner defaults on the mortgage, the lender gets both the pledged assets and the home.
These loans are temporary buydowns that initially start off with a discounted rate that gradually increases to an agreed-upon fixed rate.
You will "buydown" the mortgage with an initial payment up-front to take advantage of lower monthly payments in the first few years. If you don't have the cash to buydown the mortgage, some lenders will forgo the fee for an higher interest rate.
A common buydown product is the 2-1 buydown:
if the interest rate on the mortgage loan is 7%, the 2-1 buydown begins with an initial discounted rate at 5% in the first year, increases to 6% in the second year, and then levels off at 7% for the remaining term of the loan.
You will need to prepay the payment differences between 5% and 7% for the first year; between 6% and 7% in the second year.
Graudated Mortgage Plans
Often referred to as the Reduction Option Loan (ROL),
or in some areas, the Reducing Interest Loan (RIL) or Mortgage (RIM).
For a fee, the homeowner can adjust their current interest rate to a lower prevailing market rate. The homeowner generally pays some up-front points for this mortgage option.
With this product, the homeowner can take advantage of lower interest rates without paying costs associated with refinancing when they choose to convert.
GPMs usually start at low interest rates and then graduate up at predetermined times.
Initial payments will be negatively amortized during the early years, then payments will rise as required to pay off the loan during the 15 or 30 year term.
The advantage of GRMs allows buyers to finance a larger loan with expectations to pay higher monthly payments over the next 5 to 7 years before leveling off at a fixed payment for the remaining term of the loan.
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