What’s a “stealth” balloon note?
There are a number of loan products which sound very similar but are not.
For example, you may encounter a “5/25 ARM.” This is a loan with a fixed rate during the first five years and an adjustable rate thereafter.
But, some loan programs are subject to a lender review after five years. Borrower beware! This means that a borrower may have to “requalify” for financing — and guess who determines if the borrower is qualified? Or, a lender may have the right to discontinue the loan because rates have risen “too much,” the borrower has a second trust, or for “other” reasons.
In such situations the lender has enormous leverage. If the lender makes a decision not to continue the loan, the loan can be called and the borrower will instantly owe the outstanding balance — a huge balloon note.
Protect your interests. Always ask about the length of the loan term and whether there are any conditions, other than non-payment, under which the lender can call the loan. Feel free to ask your lender by email — that way you will have answers in writing.
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