Balloon Mortgages

 Balloon mortgages have a note rate that is fixed for an initial period of time, and then the remaining principal balance is due at the end of the term. When the final balloon payment is due at the end of the term, the borrower can either refinance into another mortgage or pay off the balance. The balloon loans do not have any penalties for paying off the loan earlier than it is due. You would be able to refinance the loan at any time during the term. The two different terms a balloon loan can have are typically 5 or 7 years. For example if you had a 7 year balloon mortgage with an interest rate of 7.5%, your rate would remain constant for the full term and at the end of 7 years, the remaining principal balance would become due.

 

Graduated Payment Mortgages

Graduated Payment Mortgage is a loan where the payment graduates (increases) annually for a predetermined period (e.g. five or ten years), and then becomes fixed for the duration of the loan. During times of high interest rate, borrowers use them as leverage to be able to more readily qualify (because the initial payment is less). But the downside is that even though the initial payment is less, the interest owed is not - and the payment shortfall in the early years is added back onto the loan, which can result in negative amortization.