What Is a 15-Year Balloon?
July 17, 2006, Reviewed January 27, 2010
"I have been offered an 80/20 loan on which the second mortgage (for 20% of price) is a 15/30 balloon. As I understand it, I have to pay off the balance of this loan after 15 years, which worries me. Should it?"
No, in the worst case you will have to refinance in 15 years.
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 5 and 7 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 5 or 7 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% down take piggyback deals instead of buying mortgage insurance. A piggyback is a first mortgage for 80% of value and a second mortgage for 5%, 10%, 15% or 20% 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.
It should not be a source of anxiety. 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.
"I have been offered an 80/20 loan on which the second mortgage (for 20% of price) is a 15/30 balloon. As I understand it, I have to pay off the balance of this loan after 15 years, which worries me. Should it?"
No, in the worst case you will have to refinance in 15 years.
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 5 and 7 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 5 or 7 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% down take piggyback deals instead of buying mortgage insurance. A piggyback is a first mortgage for 80% of value and a second mortgage for 5%, 10%, 15% or 20% 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.
It should not be a source of anxiety. 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.
