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Balloon Loans and Terms

Question: 
On our balloon loans, the amortization period of the loan is longer than the term of maturity, so what term should we use when calculating rate spread?
Answer: 

The term would be used. For example, in the case of a fixed-rate loan that has term to maturity of seven years and has a balloon payment because the payments are amortized over thirty years, the term of seven years must be used. In the case of a variable-rate loan that has a term to maturity of thirty years and whose rate is fixed for five years and then adjusts annually over twenty-five additional years, the term of five years must be used.

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First published on 06/28/2010

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