What is a 15-Year Balloon Mortgage
What is a 15-Year Balloon Mortgage? - Balloon loans all have terms of 30 years, meaning that the payment is calculated over that period, but the balance is due earlier. The most widely available balloons have been for five and seven years, and are viewed as alternatives to 5- and 7-year adjustable-rate mortgages (ARMs). The rates are a little lower on the balloons because there is no limit on the rate at which they are refinanced when the five or seven years is over. ARMs do have such a limit.
The 15-year balloon has become popular for a completely different purpose: they are used as the second mortgage in a piggyback arrangement.
Many borrowers putting less then 20 percent down take piggyback deals instead of buying mortgage insurance. A piggyback is a first mortgage for 80 percent of value and a second mortgage for 5 percent, 10 percent, 15 percent or 20 percent of value, depending on how much of a down payment the borrower makes. Sometimes the second mortgage is adjustable rate, but an increasingly common option is the 15-year balloon.
Most home buyers are not in the same house 15 years later; they have since moved and paid off both mortgages.
Among those who are still there, a number have channeled extra payments to the second mortgage and paid it off within the 15-year period. (One of the advantages of a piggyback is that it allows borrowers to channel extra payments to the high-rate loan). Of those still in the house after 15 years who have a balance on the second, the great majority will have enough equity to refinance both loans into one on advantageous terms.