 | Chuck Bullock
is the Vice President of Lending at Boeing Wichita Credit Union. He has been involved in Consumer and Mortgage lending for a combined 19 years. During his career, he has been responsible for loan applications, processing, closing, underwriting, appraisals, loan servicing and collections. In his current role, he is responsible for the Consumer Loan, Real Estate, Business Services, and Special Accounts/Collections departments. Boeing Wichita Credit Union is a $321 million credit union, the largest in the state of Kansas. Chuck can be reached at (316) 651-5105. |
Banking & Finance
2003-08-01 13:57:00
Mortgages & balloon notes
: Are balloon notes possible for residential mortgages?
ANSWER: While they comprise a small part of the overall mortgage market, balloon notes are available, and serve as a viable alternative to their fully amortized counterparts. Because a mortgage is typically the largest financial commitment most of us undertake, making an informed decision is important in determining whether this type of loan is the best value for you. Understanding the mechanics of a balloon note is where we'll start. Balloon notes, on the surface, have similar characteristics as any other - they have a stated term and loan payments are applied in the same fashion. Their distinguishing factor is a "call provision" that is defined in the Note, declaring the loan due-and-payable at a predetermined date. And it is at that date the consumer must pay off the balance of the loan. Lenders that offer this type of financing vehicle commonly feature a 7, 10, or 15- year balloon provision. This raises the all-important question, "What if I don't have the liquidity to pay off the balance?" The consumer has two options. First, negotiate a new loan with their current lender, rewriting the balance at the then-current interest rate. Second, arrange for a refinance with a different lender, prior to the call date specified in your current note. In either situation, don't wait until the last minute to begin your refinaning. Today's rate environment has most lenders averaging 45 - 60 days turnaround time, from time of application to funding. Begin doing your homework early. Given the multitude of alternatives in today's product rich environment, why would someone opt for a balloon note? Risk. You see, by building in a call provision, the lender is hedging their interest rate risk, and subsequently may offer the consumer an attractive mortgage rate as an incentive to do business with them. Both parties benefit from such an arrangement - the lender isn't committed to a rate for thirty years and the consumer realizes a lower monthly payment. Balloon loans can be a good value for the rate-conscious consumer. And statistics show that you'll move from your current home in 7 years anyway. The average life of a mortgage loan today is about 48 months. So, if you fit the profile of the average homeowner, the possibility that you'll be faced with a "call" is not much of a consideration. In conclusion, balloons aren't for everybody. But they do provide a good value for a big segment of our mortgage population. As always, do your homework and weigh your options carefully.
