Question:

Are balloon mortgage rates better than ARM rates?

Answer:

Essentially, no. Balloon mortgage rates have no cap. In case of huge inflation over the years, a balloon may adjust up to the full market rate whereas an ARM will have a lifelong cap that will usually not exceed 6% over the initial rate.

Additionally, balloon mortgage rates do not remain the same after the end of the initial period, same as ARMs. However, a balloon will usually be convertible only if the borrower does not have late payments for the previous 12 months. Thus, if you had trouble making the monthly balloon payments, the lender may very well refuse to convert your balloon mortgage into an FRM and you may end up stuck with a balloon payment you cannot afford.

Unlike balloons, ARMs will not get you into trouble with a lump sum. Rather, some negative amortization may occur but you should have time to step out of a less favorable ARM. Even when you have to refinance the ARM and you are paying large closing costs, it is much better than being stuck with half or more of your mortgage balance due, as it happens with balloon mortgages.

Also, even if the balloon holder qualifies for a balloon refinance, they are always stuck with refinance closing costs, whereas it is not always needed to refinance out of an ARM, which again doesn't get you any closer to favorable balloon mortgage rates.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
Was this Mortgage QnA helpful?
Not at all
  • Currently 2.9/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Definitely
Add to this Answer

Mortgage QnA is not a common forum. We have special rules:

  • Post no questions here. To ask a question, click the Ask a Question link
  • We will not publish answers that include any form of advertising
  • Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
If you have trouble reading the code, click on the code itself to generate a new random code. Verification Code Above:
Bookmark and share this QnA: