Hot Mortgage Deals

Reading the news for the last two weeks you would either think the government has the credit crisis in control after hitting its 500,000 trial loan modifications or that there is no hope after seeing the rise in prime mortgage foreclosures and the rise in unemployment.

The truth is that nobody really knows what is going on right now in the economic arena. Last week Citigroup lowered their “emergency fund” for bad or non performing loans which surprised analysts that fail to find evidence of an improvement of credit payment ability.
Loan modifications can be a great solution for some. For others it is not a possibility or simple will setback the inevitable with hard earned tax dollars.

Loan modifications are not for everybody because loan modifications can only “attack” certain causes of high loan payments, namely high interest rates, length of tenure, interest stability  and principal payment structure.

This means that if you already have a long mortgage (30 or 40 years), it is a fixed mortgage (as opposed the a variable or ATM mortgage) and low interest rates there is not much a loan modification can do for you because you already have a “good deal”.
All is not lost though. There is one option left open for you that might just be the difference between foreclosure and saving your home, and that is balloon payments.

What is a balloon payment?

Balloon payments are a kind of interest break your mortgage provider gives you so your monthly interest payments are not so high. Let’s explain with a simple example. Imagine you owe your bank $100,000 your interest rate is around 3% which means you will pay around (probably a little less)  $3,000 interest the first year. However what your bank or mortgage provider can do in order to lower your interest payments and therefore your mortgage payment is defer a portion of your principal to the end of the mortgage “forgiving” the interest on this amount until the end of the mortgage. Going back to our little example, your bank might defer $20,000 leaving you with “only” $80,000 to pay for, dropping your first year interest payments by over $600. We have oversimplified this example heavily, but you get the idea.

The only catch with this option is that you are leaving yourself a lot of principal to pay till the end of your mortgage. If you are planning to sell your home in the near future this might not be a problem. But if you want to keep it long term you are going to have to find the way to pay the “balloon payment” once your mortgage tenure is over.

Balloon payments can be used as yet another tool to reduce your monthly payments by combining it with other options that might be open to you. Research all your options and contact an expert. Experts will not cost you money because the government is providing the best advice for free.

Related posts:

1. Creative Ways a Loan Modification Lowers Your Monthly Payments
2. Are mortgage modifications cost effective
3. Loan Modifications, The Truth Behind The Spin

Related posts:

1. Creative Ways a Loan Modification Lowers Your Monthly Payments
2. Are mortgage modifications cost effective
3. Loan Modifications, The Truth Behind The Spin

A balloon mortgage is one in which monthly payments are made for a pre-determined period of time, with the balance of the loan paid in full at the end of the loan term. Like an ARM, interest rates on a balloon mortgage are typically lower than on a fixed rate mortgage and this makes the monthly payments on a this type of mortgage are very low and affordable. Balloon mortgage loans are calculated to amortize over a longer period than the due date of the balloon. A balloon, or lump sum, payment is required at the maturity of the loan to completely pay off the remaining principal. Therefore its important to keep in mind that the terms on a balloon mortgage are insufficient to completely amortize the loan.

Balloon mortgages can, and often do, contain a contractual opportunity to refinance at prevailing rates when the balloon payment is due. If the balloon mortgage loan has the option to be refinanced when the initial period expires, it will be called a convertible balloon mortgage. Some balloon mortgages come with “reset” clauses that provide for the original lender to reset the loan terms so that the loan is fully paid off in the remaining twenty three to twenty five years. The advantage of a balloon loan with a reset is that the loan payment will remain constant for the remaining life of the mortgage. The disadvantage is that the borrower is subject to the then current rates. If you are unable to convert or refinance the balloon mortgage, you may be forced to sell your home to make the loan whole. However, for the initial period of the loan, the interest rates on a balloon mortgage are usually a little lower than a comparable Adjustable Rate Mortgage.

Alternatively, with a fixed-rate mortgage you’ll have the benefit of knowing exactly what your monthly payments will be for the entire term of the loan. Because few people have the funds to fully pay off the balance due at the end of the balloon term, when using a balloon mortgage as the instrument of financing, the borrower should be concerned about future interest rates because they will be subject to them when the loan matures. However, most people that take out balloon mortgages assume that they’ll be moving within the term of the balloon period or that they will be eligible for a more attractive loan at the end of that period. Many people also use balloon mortgages to get that larger dream house. This strategy can, in fact, be fairly risky and a borrower should consider the market risk against the benefit of a larger home. Again, at the end of that period, the borrower must pay off the loan in full – this is the “balloon” payment. For example, a 7 year balloon calculated to amortize over 30 years will have low payments for 7 years and then the remaining balance will be due.

Before borrowing it’s important to consider whether you already have too much debt, whether you will be able to service the debt if you refinance at the end of the balloon period (or pay the balance), the risks associated with the current real estate market, and other factors as well. While it can be fairly easy to make the monthly payments on a balloon mortgage, it is very important to consider that there could be difficulty in managing the terms of the loan once it matures. In the current climate, fixed-rate mortgages are definitely the “loan of choice” for homeowners seeking a refinance mortgage, but if all the factors are considered and risks weighed, a balloon mortgage can be a viable alternative. Loan programs vary depending on the borrower’s credit, closing costs vary from state to state, work with your loan officer to get a proper estimate when you apply for your loan.