Loan Comparison Interest Only Home Equity Loans Versus Balloon 2nd
Mortgage

Loan Comparison Interest Only Home Equity Loans Versus Balloon 2nd Mortgage



Loan Comparison: Interest Only Home Equity Loans Versus Balloon 2nd Mortgage
What is​ an​ interest only home equity loan? This is​ a​ loan where the​ principal borrowed is​ not paid back each month only the​ interest is​ repaid .​
The principal borrowed may be due in​ 10,​ 15 or​ 20 years .​
a​ borrower may decrease the​ amount of​ principal due in​ the​ future by making payments on​ the​ principal.
Interest only mortgages may be adjustable rate mortgages (ARM) or​ fixed rate mortgages .​
a​ fixed rate mortgage will have a​ set payment for the​ period of​ the​ loan .​
ARM mortgages will have a​ fixed rate initially for a​ six-month period,​ and then the​ rate will increase or​ decrease based on​ an​ index,​ prime rate or​ five-year treasury rate.
A balloon second mortgage is​ a​ short-term mortgage with a​ fixed rate of​ interest .​
Balloon mortgages require repayment of​ principal and interest .​
The monthly payments of​ principal are not based on​ the​ five-year term of​ the​ mortgage but a​ longer amortization period of​ 30 years .​
Balloon mortgages must be refinanced every five years at​ the​ expense of​ the​ borrower and subject to​ any dramatic increase in​ interest rates.
One of​ the​ advantages of​ the​ balloon second mortgage is​ the​ lower monthly payments could yield additional funds for debt consolidation and home improvements .​
With lower monthly payments the​ homeowner has more money to​ budget towards other expenses .​
If the​ balloon mortgage is​ repayable in​ five years and the​ ARM is​ a​ 5/20 loan,​ both loans must be refinanced in​ five years .​
the​ balloon second mortgage must be refinanced with a​ new second mortgage,​ a​ line of​ credit or​ a​ home equity line at​ the​ expense of​ the​ borrower .​
ARM mortgage rates reset using a​ mechanical rate adjustment procedure set in​ the​ original contract and have a​ cap on​ the​ amount the​ rate of​ interest may be increased.
Currently the​ rates on​ balloon mortgages are generally lower then the​ rates on​ ARM mortgages .​
If one were sure that rates would be lower in​ five years,​ the​ balloon mortgage would be a​ wise choice .​
If one is​ unsure of​ future interest rates the​ security of​ knowing the​ maximum rate the​ interest can be five years in​ the​ future would be worth the​ slightly higher cost of​ the​ ARM mortgage.
Both of​ these second mortgage loans can co behind a​ negative amortization loan in​ 1st position,​ as​ long as​ the​ broker or​ lender allows the​ deferred interest loan .​
Check with your home equity lenders to​ make sure that they will allow you​ to​ get a​ home line of​ credit or​ second mortgage behind a​ payment option ARM .​

If we had a​ crystal ball to​ look into the​ future the​ comparison would be simple .​
In a​ scenario with 15% interest rates the​ ARM would be the​ wise choice while in​ a​ scenario with 5% interest rates the​ balloon mortgage would be the​ wise choice .​
Unfortunately the​ uncertainty of​ the​ future of​ interest rates makes it​ clear there is​ some risk involved in​ making this decision.




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