Balloon/reset mortgages have monthly mortgage payments based on a 30-year amortization
schedule, and you have a choice at the end of the 5- or 7-year term to either
pay off the remaining balance or reset the mortgage. 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.
Many balloon mortgages have a "reset" option. That means you can reset the
interest rate of your mortgage to the current 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.
have no other liens against the property.
- If you do not qualify for a reset,
you may 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 balloon maturity date of the
balloon/reset mortgage, this type of mortgage, like an ARM, may be a good
- Balloon/reset mortgages usually come with a slightly lower initial
rate than most other fixed-rate mortgage types. You may qualify for a larger
loan amount with a balloon/reset mortgage than you would with a fixed-rate
Unlike ARMs, whose interest rates may reset or adjust a number of
times over the loan's life, a balloon mortgage comes with only adjustment.
However, if interest rates rise sharply during the term of the balloon loan,
you could face a large increase in your monthly payments when you reset or
refinance your mortgage.
- If your financial condition has changed at the end
of the balloon term because of a decline in income, family medical problem,
etc., you may have difficulty refinancing into an acceptable new mortgage.
What the numbers mean. There are 2 types of balloon/reset
mortgages: 7/23 and 5/25. The two numbers together are the total number of years
(30) the payments will be based on. The 1st number (7 or 5) is the number of
years before the balloon maturity date. The 2nd number (23 or 25) is the balance
of the term.
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