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.
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