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 Balloon/Reset Mortgages
Balloon/reset mortgages may be a good choice for homebuyers who don't expect to own their home past the maturity date of the balloon note: 5 or 7 years.
Balloon/reset mortgages have monthly mortgage payments based on a 30-year amortization schedule but the entire mortgage balance becomes due at the end of the 5 or 7 year term.
However under the reset option you may be able to "reset" your mortgage interest rate at the market rate at that time for the remainder of the amortization period if:
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you are still the owner and occupant of the home
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you have not been delinquent in your mortgage payments for a year before the maturity date of the balloon note
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you have no other liens against the property
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you have satisfied certain other conditions of the reset
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You may also qualify to refinance your balloon/reset mortgage.
You might also consider a balloon/reset mortgage if you can't afford the home you want because the monthly payment for an ARM or fixed-rate mortgage exceeds your Debt-to-Income Ratio. Balloon/reset mortgages typically come with a slightly lower initial rate than many other mortgage types.
If interest rates have increased during the term of the balloon note, when you reset or refinance your mortgage, the interest rate you pay will be at the current rate. This may be quite an increase in your monthly payments.
Types of Balloon/Reset Mortgages
There are several types of balloon/reset mortgages: 7/23 balloon/reset or 5/25 balloon/reset
The two numbers combined indicate the total number of years that the payments will be based on. In other words, your monthly payments will be calculated as if the mortgage had a 30 year term.
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The first number is the number of years before the balloon maturity date and the second number is the balance of the term.
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If you exercise your option to reset your balloon/reset mortgage, the reset mortgage will have a term of 23 or 25 years. For example, a 7/23 balloon/reset mortgage means that your payment for the first 7 years will be based on a 30 year amortization but at the end of the 7 years, you would need to exercise the reset option or refinance the mortgage and pay off the loan balance.
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At the balloon maturity date, many borrowers exercise the reset option and reset the interest rate to the market rate and extend the term 23 or 25 years. Some borrowers refinance their homes when the balloon note comes due.
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"Until we talked to the First Patriot professionals, I had no idea getting pre-approved could be done so quickly. Our loan officer, Jeff, made the mortgage process understandable and helped us make some big decisions towards buying our first home."
- Scott and Mary Beth Hamwey, Boston, MA
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