Balloon/reset mortgages have monthly mortgage payments based on a 30-year amortization schedule, but the entire mortgage balance is due at the end of the 5- or 7-year term, unless you choose to reset your mortgage at the current rates. So you have the advantage of a low monthly payment, like someone with a 30-year loan, but you must pay off the loan at the end of the specified term or exercise your reset option at the end of the term. Many borrowers think of balloon/reset mortgages as "two-step" mortgages.
Many balloon mortgages have a "reset" option. That means you can reset your mortgage interest rate at the market rate for the remainder of the amortization period. This option is typically only available if:
• You're still the owner and occupant of the home.
• You've paid your mortgage on time for at least a year prior to the balloon note maturity date.
• You have no other liens against the property.
• You've satisfied any other conditions of the reset.
You may also qualify to refinance your balloon/reset mortgage. There are additional considerations to be aware of with balloon/reset mortgages:
• If you plan to sell your home before the maturity date of the balloon/reset mortgage, this type of mortgage may be a good option. But, keep in mind that if you end up staying in your house when the loan matures, you will need to reset or refinance the mortgage.
• Balloon/reset mortgages usually come with a slightly lower initial rate than most other mortgage types. You may qualify for a larger loan amount with a balloon/reset mortgage than you would with an ARM or fixed-rate mortgage.
• If interest rates increase during the term of the balloon loan, you may have a large increase in your monthly payments when you reset or refinance your mortgage.
