Balloon Mortgages: A Relic of the Boom Survives?
Honestly, I thought balloon mortgages--loans that come due after a short period, forcing a refinance--were killed off by the real estate crash. But I learned that online lender ING Direct is still offering these risky loans. Only now they're taking steps to limit their own risk by requiring at least a 25 percent down payment (or equity, if it's a refinance).
The payoff for borrowers: A 4.25 percent interest rate, which is well below current rates. And ING Direct promises very low closing costs, too.
Company officials said they're aiming these loans at customers who have demonstrated an ability to save money, hence the 25 percent down payment requirement. And they say various features of the loan will allow borrowers to pay off their homes more quickly than if they took out a traditional mortgage.
But borrowers assume big risks in return for that low rate.
This loan requires bi-monthly payments. You send in half of the monthly payment every two weeks.(They penalize you if you send it any way but by electronic debit.) That adds up to one extra mortgage payment each year. It does help you pay off the mortgage faster--and therefore helps you build equity more quickly. But, with more cash going out of your checking account each year, your budget will feel the pinch. Plus, under this loan, you don't have the option of dropping back to a regular 12-payments-a-year plan.
Of greater concern, however, is that balloon feature. Your interest rate is fixed at 4.25 percent for five years. After that, the entire unpaid balance comes due. Loan payments are calculated as if you would be paying off the loan over 30 years.
Oh, and there's a yet another catch: If you pay off the loan during the first year, for whatever reason, including the sale of your house, you owe a prepayment penalty equal to 3 percent of the outstanding balance.
Scott Lugar, head of home sales and mortgage home loans for ING Direct, said that the bank will refinance anyone who has a good payment history and that a full evaluation of the borrower's credit status won't be required. (That's good news if you happen to fall ill or get laid-off right at that five-year mark.) But you then would be captive to ING Direct for that refinance. Under such conditions, no other lender would approve a loan for you.
Also, at that five-year refinance point, there are no caps limiting how high your interest rate could go. You would have to refinance at the current market rate. Considering that mortgage rates are now near historic lows, that would certainly give me pause.
And, your price to refinance that loan? One month's worth of mortgage payments. That would not reduce your debt; it would simply be considered a fee to the bank.
I was surprised to come across a loan like this, given all that has been learned from the financial crisis. Does it sound appealing to you?
July 13, 2009; 6:00 AM ET
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