Most of us can probably eliminate the Uncle Wilbur option, and an increase in the financial hermit population seems unlikely in a country with a minimal savings rate. This means the most likely way to avoid foreclosure is by refinancing the balloon payment.

But, alas, things don't always work out as planned. What happens in five or seven years if rates rise but your income doesn't and you no longer qualify for financing? Or, what happens if property values decline and lenders will not provide a loan big enough to cover the balloon payment?

At this point someone might mention that balloon financing is often available at somewhat lower rates than competing 15- or 30-year loan products. Freddie Mac points out that in a market where a typical 30-year loan is priced at 7.58 percent interest, a five-year balloon note might be available for 7.02 percent.

But interest is not the only cost faced by borrowers. There is a cost to close, and if you refinance there is likely to be a need for a new settlement, complete with title searches, surveys, tax payments, legal fees, and other expenses. While additional closings may not be "interest," they are surely an expense which reduces checking account balances and personal wealth.

Some balloon programs allow borrowers to avoid refinancing costs, continue the loan and convert or re-set the loan's interest rate. That may be a better deal than refinancing -- if the new interest rate is competitive, if qualification standards allow for continuation, and if the lender does not have a right to unilaterally decline the loan. But why have a mortgage with so many future "ifs" when assured 30-year ARM financing is available?

For most people, balloon notes represent too much cost and too little security. The public understands such factors, the reason balloon notes only represent about 1 percent of the mortgage marketplace.

Question Of The Week

Q We have asked our lender to end PMI. First they said we need an appraisal plus a $50 termination fee. A week later they said the $50 fee had been dropped but that we would now need 25 percent equity to cancel PMI. How can they change the rules?

A New PMI cancellation guidelines under the "Homeowners Protection Act of 1998" are now in effect -- but they only apply to new loans. Older loans are governed by the older rules, which in essence means the lender can set cancellation standards.

Even under the new rules, lenders can continue PMI up to 15 years for so-called "high-risk" loans, regardless of equity. As well, the new rules do not apply to FHA financing.

If you have a solid payment history then a continued conversation with your lender may be worthwhile. If you cannot get the answer you want speaking with one person, work your way up the chain of command to see if a better response is available.

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