What is a Balloon Mortgage?

A Balloon Mortgage is a mortgage that has a payment term of five to seven years with a payment amount based on thirty years. At the end of the five to seven year period the remaining balance of the mortgage (the balloon) is due. This creates additional risk to the borrower because they must pay the remaining balance on the mortgage, refinance, sell the home, convert to a traditional mortgage at market based interest rates, or foreclose on the home all together. This is referred to as "rollover" risk and can be a major problem if an additional loan can't be acquired to pay off the balloon or the property can't be sold. As a result, the borrower may face bankruptcy even though the property is worth more than is owed on it. That is because the borrower was expecting liquid assets (cash) at the point the mortgage matured.

The advantage of a Balloon Mortgage is cheaper interest rates and easier qualification hurdles than a traditional 30-year Fixed Rate Mortgage. This is a good idea for a savvy homebuyer that may not be able to qualify for traditional mortgages but anticipates being able to refinance or sell the property within the five to seven year period. Choosing a Balloon Mortgage in this situation gives the borrower enough time to increase income, obtain another mortgage, or build equity and sell the home at the end of the seven period.

Another option that is common with Balloon Mortgages is a two-step mortgage, or a Balloon Mortgage with a reset option. The reset option "resets" the Balloon Mortgage into a more common mortgage type at current interest rates and matures in the typical thirty years after the Balloon period is over. This reduces the refinance risk incurred by the borrower and makes it a more viable option.

ARM Crisis - How'd We Get Into This Mess?

"It's all fun and games until someone loses an eye." That's what our mothers used to say when we played rough as children. In this case it's all fun and games until someone loses a house. In the last two or three years the U.S. housing market has experienced a considerable amount of disappointment (some may say crisis). It all started with soaring house prices in Michigan, California, Nevada, Florida and Arizona. Eager investors, professional and amateur, wanted to ride the wave anticipating the prices to continue soaring. Mortgage lenders eager to get in on the business began offering option ARMs that allowed practically anyone to buy a house they couldn't afford. These Adjustable Rate Mortgages came tied with agreements that allowed the interest rates to climb as much as 6% by the first adjustment period!

The unsuspecting homebuyer (or eager fool) was faced with a house payment that just about doubled in the wake of rising interest rates. Instead of a manageable 5 or 6% many homebuyers were faced with 10% on homes that were out of their price range to begin with! The, now astronomical, interest rates forced buyers out of the market and, in turn, dropped house prices. So not only can homebuyers not afford their mortgage they can't afford to sell either because their home isn't even worth what they initially paid for it.

Next comes foreclosure. Mortgage lenders began pulling these overpriced money traps out from under people and became stuck with them themselves. Consequently, investor confidence in mortgage backed securities declined and interest rates continued to climb as a result. In addition (if that wasn't problem enough) mortgage lenders could no longer raise funds to lend and couldn't collect payment on outstanding loans. This caused 177 top lenders to shut their doors since February.

To add to all this the subprime market pretty much shut down leaving low income and hurt credit buyers out in the cold. Simple economics shows that when demand decreases supply increases. Thus, the housing market is now flooded with houses that can't sell and the lending market can't open its doors to would be buyers.

As a lesson, homebuyers need to be educated on mortgage products before they decide to buy a home. Knowing what options are out there and selecting the right one is critical. Websites like Mortgage Super Search.com provide a wealth of information and mortgage calculators that allow prospective homebuyers to do adequate research before they are ready to sign on the dotted line.

Second Mortgage - What You Should Watch Out For

What is a Second Mortgage

A second mortgage is a mortgage taken out in addition to the first mortgage on a home. In many ways it is similar to a home equity loan because the second mortgage is secured using the home's equity. From a lender's perspective a second mortgage is more risky than a first mortgage because in the event of a default (foreclosure, bankruptcy, etc.) the first mortgage must be completely paid off before the second mortgage can receive any payments. Thus, the interest rates for second mortgages are higher than the interest rates on a first mortgage.

Similar to a first mortgage, a second mortgage can have a fixed interest rate or an adjustable interest rate. It's important to determine what your financial objectives are before commiting to a specific mortgage type. Think about what it is the funds from your second mortgage will go towards? Are you improving your home to increase its value? Or are you going to use the funds to go on vacation or fund college expenses?

Mortgage Purchase or Refinance

Costs to Watch Out for with a Second Mortgage

Just like a first mortgage, second mortgages have several costs associated with them (sometimes more). These can include appraisal fees, points, application costs, closing costs and title searches. Appraisal fees, application costs and title searches are usually pretty standard. The ones you'll want to watch carefully are points and closing costs. These are fees that a lender will charge for writing your mortgage. It's obvious that a lender wants to make the most money possible so it's a good idea to compare these fees with other lenders and negotiate them as much as possible.

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Other Things to Watch out for with a Second Mortgage

There are an additional number of facets regarding second mortgages that should be taken into consideration before signing on the dotted line. These include the APR, default penalties, prepayment penalties and balloon payments. This is where speaking to several different lenders comes in handy. Try speaking to a loan officer from a brokerage, bank and credit union. This should help to gain a good perspective on what is happening in the market in terms of interest rates. Default penalties, prepayment penalties and balloon payments should be avoided at all costs. Default penalties act much like those associated with credit cards. Your interest rate rises and your payment follows suit. Prepayment penalties can be a terrible thing if you need to refinance or plan on selling the home. This guarantees that the lender will make money even if the mortgage is paid early but does absolutely nothing for the borrower. Lenders also try to entice borrowers with an exceptionally low payment and cover over the fact that there's a balloon payment at the end of the loan. This is large, lump sum payment that must be paid all at once. Unless you plan on having this lump sum this should also be avoided at all costs.

Home Equity Loans

Reverse Mortgage - Right for You?

A reverse mortgage is a mortgage product designed for those over 62 years old. It's called a "reverse" mortgage because instead of making payments to the bank to build equity in your home the bank pays you, thereby reducing the equity that has built up in your home. This mortgage product tends to be used by those who are committed or plan on staying in their home, need additional income and have no other assets, own their home outright or have only a small first mortgage and don't plan on leaving their home to their heirs. Reverse mortgages definitely aren't for everyone so continue reading to see if it's right for you.

Potential Reverse Mortgage Drawbacks

Just like all other mortgage products there are potential pitfalls. Being aware of them before closing on a reverse mortgage will help prepare you for what is to come. First, the proceeds from a reverse mortgage could effect eligibility for supplemental social security income and medicaid benefits. Since regular social security and medicare benefits aren't based on income and assets these are unaffected. Reverse mortgages (like all other mortgages) have costs and fees associated with them. This could make a reverse mortgage an expensive finance tool. If other assets are available (retirement accounts, stocks, bonds, etc.) it's better to use those first. Lastly, a reverse mortgage reduces the equity in your home. It can't be reduced to more than the home's fair market value but it could reduce what is available to your heirs as inheritance. If any of these drawbacks seem like a potential problem down the road it would be wise to reconsider the decision to apply for a reverse mortgage.

Typical Requirements

Since there are all kinds of reverse mortgage products offered by all kinds of lenders and government programs there are different standards that need to be met in order to qualify. Generally, the youngest borrower must be over 62 years old by the time the reverse mortgage closes. Next, the home can't be a mobile home or co-op apartment and it must be the principal residence of the borrower (more than half the year must be spent at this residence). Lastly, the home must meet minimum FHA property standards and the remaining mortgage on the home must be paid off either before the reverse mortgage closes or using the reverse mortgage proceeds.

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