When it comes to financing a home, there are many different types of mortgage loans available. One lesser-known option is the balloon or reset mortgage loan. This type of loan has some unique features that can make it an attractive option for certain borrowers. In this article, we’ll explore the basics of balloon or reset mortgage loans, including how they work, the pros and cons, and who they may be best suited for.
What Is a Balloon or Reset Mortgage Loan?
A balloon or reset mortgage loan is a type of mortgage that has a short-term fixed rate followed by a large payment at the end of the loan term. This large payment is known as the balloon payment. Balloon mortgages are typically 5-10 years in length, with the balloon payment due at the end of the loan term. Reset mortgages, on the other hand, have a longer initial fixed-rate period, usually around 30 years, followed by a reset period where the interest rate and payment are adjusted based on the prevailing interest rate at the time.
How Do Balloon or Reset Mortgage Loans Work?
Balloon mortgages typically have lower interest rates than traditional fixed-rate mortgages because the lender is taking on less risk by only offering a short-term fixed rate. The borrower pays a fixed rate for the initial term of the loan, typically 5-10 years, and then the loan is due in full at the end of the term. The borrower can either pay off the loan in full, refinance the loan, or sell the property to pay off the balloon payment.
Reset mortgages, on the other hand, have a longer initial fixed-rate period, usually around 30 years, followed by a reset period where the interest rate and payment are adjusted based on the prevailing interest rate at the time. The reset period can be 1, 3, 5, 7, or 10 years, depending on the terms of the loan. During the reset period, the borrower’s interest rate and payment can go up or down based on the prevailing interest rate. The borrower can choose to refinance the loan or sell the property before the reset period to avoid the potential for a higher payment.
Pros of Balloon or Reset Mortgage Loans
Lower initial payments: Balloon mortgages typically have lower initial payments than traditional fixed-rate mortgages because the borrower is only paying interest on the loan for the initial term.
Flexibility: Balloon or reset mortgages can offer borrowers more flexibility in terms of payment options and the ability to pay off the loan early.
Lower interest rates: Balloon or reset mortgages typically have lower interest rates than traditional fixed-rate mortgages because the lender is taking on less risk by only offering a short-term fixed rate.
Cons of Balloon or Reset Mortgage Loans
Large balloon payment: Balloon mortgages require a large payment at the end of the loan term, which can be difficult for some borrowers to make.
Refinancing costs: Refinancing a balloon or reset mortgage can be expensive, with fees and closing costs adding up quickly.
Interest rate risk: Reset mortgages can be risky because the interest rate and payment can go up significantly during the reset period.
Who Are Balloon or Reset Mortgage Loans Best Suited For?
Balloon or reset mortgage loans may be best suited for borrowers who:
Plan to sell the property before the balloon payment is due or before the reset period begins.
Have the ability to make a large payment at the end of the loan term.
Want to take advantage of lower interest rates during the initial fixed-rate period.
Have irregular income or want to make lower payments during the initial fixed-rate period.
Plan to refinance or pay off the loan before the reset period begins.
