Title:
Loan
Comparison: Interest Only Home Equity
Loans Versus Balloon 2nd Mortgage
Word Count:
488
Summary:
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. A balloon second mortgage is a short-term
mortgage with a fixed rate of interest. Balloon mortgages require repayment of
principal and interest.
Keywords:
interest only
home equity loans,home equity credit lines,second mortgage balloon, second
mortgages,2nd mortgages,negative amortization loans,neg am loans, deferred
interest loans,refinance, bridge
Article Body:
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.