Choosing between a balloon mortgage and an adjustable rate mortgage, or ARM, can be confusing. Both have pros and cons, so make a decision that not only benefits you now, but down the road as well.
Most balloons are fixed-rate, for a five to seven year loan term with payments based on a loan of 30 years. Once the term is up, you either payoff the loan, or refinance the balance. The initial rate is often lower than an ARM, which can make a balloon more attractive.
There are downsides to a balloon. If rates have risen since you took out the loan, you have to refinance at a higher rate. If your financial situation changed, or the home now has a loan-to-value ratio outside of the lender’s guidelines, you may have trouble getting your refinance approved.
An ARM loan usually ranges from one to seven years in length, and payments are based on a loan of 30 years. If you have a one year ARM, the rate adjusts up or down after one year. You can refinance to a fixed-rate loan if you decide to lock in the rate, or leave the loan as an ARM.
The downside to an ARM is if it adjusts higher, the payment can become unaffordable.