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| Balloon Loans |
Balloon Loans and Two-Step Loans act like Fixed Rate Loans for the initial period--usually either five or seven years--with the advantage that they carry a lower interest rate. These are a good choice for buyers who know they will be in the home only a short time. The disadvantage is that after the initial period, the loan will go to the current rate--so there is a chance that rates, and payments, could increase substantially if you stay in the home longer than expected.
A true Balloon Loan must be paid in full at the end of the period, so new financing must be obtained at that time. In most cases the lender guarantees they will provide the new financing if the borrower has maintained a good payment record. The Two-Step Loan is actually an Adjustable-Rate Mortgage--with the first adjustment period being either five or seven years--and after that, adjustments are made every year, just like the one-year ARM.
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