Don't Let Your Balloon Burst

While many homeowners have stayed away from adjustable-rate mortgages, some have chosen to take balloon mortgages. A balloon mortgage has a fixed interest rate for a specific number of years, usually seven to ten. The interest rate is usually as low as the rate you can get on an adjustable-rate mortgage (at least initially), but when the term is up, the balance of the loan is due. You’ll either need to pay off the balance or refinance and get another loan.

Balloon notes could be advantageous if you anticipate your income will rise significantly during the term of the loan; say a spouse will return to the workforce, for example. Along the way you won’t be susceptible to short-term interest rate increases (and higher resulting payments) if interest rates do rise. But the risk is you won’t be able to refinance at a reasonable rate when the balloon is due. Start planning early, and if you feel interest rates may rise, plan to look into refinancing your note well ahead of time.