Go Ahead: Florida Refinance a Balloon Mortgage

Here’s a question from a current homeowner: Three years ago we bought our present house for $172,000 with a $35,000 down payment. At the time we did not think that we would be in the house more than three years, so we financed it with a five-year balloon mortgage.

Now, my wife’s present job circumstances make it look like we will be in the house past the five-year mark but not much longer. The house has a market value now of $320,000. Can you recommend whether we should Florida refinance now or wait and see where rates might go?

How should we refinance?

Answer: Balloon mortgages carry a unique credit risk because the entire Florida mortgage balance becomes due and payable. You’re forced to refinance at then-current market rates. With a 5/1 ARM. you could have decided to not refinance and pay prevailing interest rates until you sell the home - saving the cost of refinancing.

With two years until the loan comes due, you’ve got some flexibility on the refinancing decision.

We can’t tell you where Florida mortgage rates are headed, but we wouldn’t let too much time go by before refinancing. If rates move against you, there’s not a lot of time for them to come back before you are forced to refinance - and today’s levels are at historically attractive rates.

If you don’t expect to be in the house much longer than the five-year horizon on the original balloon mortgage, then the type of mortgage you choose doesn’t matter all that much because you won’t be in it for long.

An interest-only loan won’t have a principal component and will minimize the monthly mortgage payment. But most of the monthly payment in a traditional loan is interest in the early years anyway, so the savings won’t be that great.

The spread (difference in rates) between a 30-year fixed rate Florida mortgage loan and the interest-only 5/1 ARM is so close; we’d recommend the 30-year fixed just in case you stay in the house longer than you think you will.

SOURCE: Bankrate.com