Question:

How is the 5 year balloon mortgage different from a 5/1 ARM?

Answer:

The 5 year balloon mortgage may be a 5/15, or 5/20, or 5/30, etc balloon mortgage. In any of the abovementioned cases, it will be a mortgage with payments calculated over 15, 20 or 30 years. Thus, the payments of a 5 year balloon mortgage are very low and affordable. However, at the end of the fifth year, the borrower has two choices - they are either required to pay the balloon, which amounts to the remaining part of the loan; or an refinance if certain criteria are met.

The 5 year balloon mortgage resembles a 5/1 ARM in that they are both mortgages developed or people who are uncertain about the property they are buying. Maybe, they would like to move in 5 years to another state, or a bigger house.

In any case, in 5 years both the 5 year balloon and the 5/1 ARM will adjust to a margin according to the current requirements of the market and will allow for refinance.

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