Get cash out when you refinance your home mortgage.

BALLOON LOAN

A balloon loan is one in which monthly payments are made based upon a 30 year amortization schedule. For example, if you got a $100,000 30 year fixed rate mortgage or a $100,000 balloon loan at the same interest rate, the monthly payments would be the same: $599.56. However, with the balloon loan, the entire principal balance is due at the end of a specified period (usually 3, 5 or 7 years).

The advantage of a balloon loan is that the interest rate will be lower, and thus the monthly payments lower, than what you would get with a conventional 30 year fixed rate mortgage. The disadvantage, of course, is that after 3 or 5 or 7 years, you'll need to find a way to pay off the entire remaining balance on the mortgage.

Obviously, most people can't just pull tens of thousands of dollars from their savings accounts to pay off a balloon loan. So, mortgage lenders who issue balloon loans will offer you the option of refinancing the loan at the end of the balloon period. The interest rate when you refinance will be whatever the prevailing market rate is at the time.

If you refinance at the maturity date on your balloon loan, you won't be required to requalify for a mortgage, nor will the home need to be reappraised. There may be some additional fees involved, but the amounts will be far less than you would pay for refinancing a conventional mortgage.

A balloon loan is similar in many respects to an adjustable rate mortgage. But there are differences. One difference is that a balloon loan will typically have an interest rate that's lower than that of an adjustable rate mortgage (ARM).

One important difference between a balloon loan and an ARM is that, with an ARM, your interest rate will likely go up after the adjustment period, but you'll still have your mortgage. With a balloon loan, if you've had credit problems, you may find it difficult to refinance the mortgage at the maturity date.

Another difference between a balloon loan and an ARM is that many borrowers don't realize just how much their interest rate can increase at the end of the adjustment period on an ARM because the mortgage contract is confusing. It's not unusual for someone with an ARM to be completely surprised that his interest rate has increased by two or more percentage points after the adjustment period. That possibility was in the ARM contract, but the lender didn't spell it out well enough, or the borrower just didn't understand

With a balloon loan, the borrower knows that, when it comes time to refinance, he'll get the current prevailing interest rate, not an outrageously high interest rate.

If you're certain that your credit will remain perfect during your balloon period, and you feel comfortable that interest rates won't be much higher when your balloon payment is due, then a balloon loan may be right for you.