What type of loan allows a borrower to potentially avoid a balloon payment by refinancing?

A hybrid mortgage is a type of loan that combines elements of fixed-rate and adjustable-rate mortgages. Typically, it offers a fixed interest rate for an initial period (such as five, seven, or ten years) before transitioning to an adjustable rate for the remainder of the loan term. This structure allows borrowers the flexibility to refinance during the fixed-rate period before adjusting to variable rates, thereby avoiding a balloon payment that could arise if the loan requires full repayment at the end of the term when the rate adjusts.

This refinancing capability can be particularly advantageous for borrowers who anticipate changes in their financial situation or market conditions during the initial fixed-rate period. By planning ahead, they can secure more favorable terms or rates through refinancing, mitigating the risk of a balloon payment at the loan's maturity.

Understanding the function of hybrid mortgages in relation to payment structures and refinancing options provides insight into how borrowers can manage their mortgage obligations effectively.