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CHEAP BALLOON LOAN MAY BE FOR YOU

With fixed-rate mortgages stuck above 8 percent in most parts of the nation, home buyers might want to consider a much cheaper balloon loan.

Balloons don't appeal to everyone because they end abruptly, and unless you have a pile of cash to pay off the balance, you must move or refinance.But with a 7-year balloon, that shouldn't be a problem for many people, especially first-time buyers or corporate transfers likely to stay in a house no more than five or six years.

If you decide to stay longer, you can refinance to a 30- or 15-year mortgage - or you can get another 7-year balloon. Surveys of refinancers by the big secondary mortgage company Freddie Mac show that almost one-third of homeowners who have 7-year balloon mortgages choose another 7-year balloon when refinancing.

For example, in the first quarter this year, here's what homeowners with 7-year balloons switched to in a refinance:

30-year fixed rate - 43 percent

20-year fixed rate - 1 percent

15-year fixed rate - 18 percent

One-year ARM - 3 percent

5-year balloon - 6 percent

7-year balloon - 29 percent

"With long-term fixed rates so low in the first quarter, refinancing borrowers clearly showed a preference for the payment stability of 30-year and 15-year fixed rate mortgages," said Vassilis Lekkas, a Freddie Mac economist. "However, if long-term fixed-rate mortgages continue to climb faster than short-term rates, we would probably see refinancing activity shift to ARMS or balloons."

Rates have risen substantially since the first quarter - in mid-February you could get a 30-year fixed-rate mortgage at 6.94 percent - which makes a 7-year balloon more appealing.

Balloon mortgages, whether 5-year, 7-year or some other term, are amortized over 30 years. But the interest rate is always lower than on long-term loans because lenders are tying up their money for a shorter period.

Last week (May 10) the Mortgage Bankers Association reported the national average rate on 7-year balloons was 7.47 percent compared with 8.18 percent for a 30-year fixed-rate mortgage. And almost 7 percent of the people who got a mortgage chose a balloon of some type.

If you were to get a $125,000balloon mortgage at an interest rate of 7.47 percent, your monthly payments would be $866. At the end of seven years, you would owe about $114,000. If you were able to refinance that amount at the same interest rate - 7.47 percent - your monthly payments would fall to $789.

By contrast, if you choose a 30-year fixed rate mortgage at 8.18 percent and finance $125,000, your monthly payments will be about $926. After seven years, you will still owe $115,000, but it won't matter. You won't have to refinance. But in the first seven years of your loan, you will have paid $5,000 more than you would have with a 7-year balloon and your mortgage balance is $1,000 higher than it would have been with a balloon.

A good point to remember: Don't pay for more mortgage than you need.