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player ready...Balloon mortgages can be scary because they end abruptly after a short period-five to seven years-and then require you to refinance, sell the property or come up with a bundle of cash.
But rates on balloons are extremely attractive right now, making them ideal for buyers confident they’ll be moving on by the time the balloon is deflated.
You can get a 5-year balloon at an interest rate of 6.1 percent and a 7-year balloon at 6.5 percent, each with fees of 1.7 points (a point is 1 percent of the loan amount), according to the Mortgage Bankers Association’s most recent weekly survey.
By comparison, a one-year ARM, or adjustable mortgage, linked to the one-year Treasury index is offered at 4.5 percent on average with 1.7 points.
In some competitive markets you can find ARMs as low as 3.5 percent with 3 points, according to Keith Gumbinger at HSH Associates, a mortgage information service.
To decide between an ARM and a balloon, you need to do some calculations:
If you keep a house for only five years, each point you pay is very costly. Think of points as interest and add them to your costs over five years. That exercise will make you want to pay fewer points.
A typical one-year ARM that starts at 4.5 percent will rise to about 6.1 percent during the second year if interest rates remain as low as they are today. If rates rise, the second-year rate could be as high as 6.5 percent. With an outbreak of inflation, the rate could keep rising in the following years to a maximum of 10.5 percent.
On the other hand, an ARM that starts at 3.75 percent can’t rise to more than 5.75 percent the second year. If interest rates stay relatively low for the next few years, you’ll come out far ahead with an ARM over five years, especially if you’re buying a house, rather than refinancing, and the seller will pay some of your points.
A balloon takes the guesswork out of the decision. Your payments will remain constant over the full five or seven years of the mortgage.
Balloons are widely available but are less popular than ARMs, accounting for only 4.8 percent of the loans in the Mortgage Bankers’ most recent survey. ARMs accounted for 11 percent.
How would your monthly mortgage payments compare? Here are some examples, based on a $100,000 mortgage:
– A 5-year balloon at 6.1 percent interest-$604.
– A 7-year balloon at 6.5 percent-$632.
– An ARM at 4.5 percent-$507.
– An ARM at 3.75 percent-$463.
– An ARM at 8.5 percent-$769.
Over five years, payments on the 5-year balloon would total $36,240 on the $100,000 mortgage.
An ARM that started at 3.75 percent, rose to 5.75 percent the second year, 6.5 percent the third year and 7 percent in each of the next two years would cost $36,108, approximately the same as the 5-year balloon.
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