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What Is The Difference Between An ARM And A Balloon Rate Mortgage?

By Stacy Williams

ARMS Are Pretty Easy To Figure Out

Adjustable rate mortgages start off with a lower interest rate which allows the homeowner to make a lower mortgage payment and then it adjusts, upward, an agreed amount during a disclosed time frame. The interest rate paid on an ARM will increase by up to four to six points from the start rate of the home loan.

,h2>Some ARMS Were Quite Prevalent

Popular sub-prime products were the two-twenty eight and three-twenty seven programs. What that meant was a lower rate was fixed for a two or three year term and then it adjusted, usually every six months until it reached the cap, the highest rate by contact, it could go. The interest rate would remain at the higher level for the remaining term of the loan, but at all times the adjustable rate mortgage was amortizing the total amount of the home loan, which is significant difference between the ARM and the balloon rate mortgage.

Why Buy A Balloon Mortgage?

Balloon rate mortgages reduce further the monthly payment. The underlying loan could be an adjustable rate mortgage, a fixed rate mortgage or an interest only product. It is most often used for interest only loans. With the balloon rate mortgage, a specified amount of the total loan is not used in figuring the monthly payment. It is set aside gaining interest. By amortizing a lesser amount, no matter what product is used, the results are a lower monthly mortgage payment.

How The ARM And The Balloon Mortgage Differ

At the end of the balloon rate mortgage loan term, the set aside amount or the balloon still needs to be paid. This is either in cash or by acquiring a new loan. This is the major difference between an ARM mortgage and a balloon rate mortgage. The balloon product is an excellent fit for people who have no intention of staying in the home for a long time. Members of the military are frequent users of this loan product as are college football coaches.

Related posts:

1. What Are Balloon Mortgage Loans?
2. What Is A Balloon Rate Mortgage?
3. What Is The Difference Between An Adjustable Or Fixed Mortgage Rate?
4. Fixed Rate Mortgage-Is It Right For You?
5. What Are The Standard Terms For Home Mortgage Loans?