Which is a better loan deal?

I don't like balloon payments. Ask everyone in mid 2000 how the balloon payment was. Or wait it cost them everything

Balloon payments weren't the problem. Zero am loans and NINJA loans with teaser rates were the problem.

I would take the balloon payment, you can always prepay principal, but you can't claw back interest you already paid.

I say 4.25%, that lowers your payment around $100/m

ETA: approx $100/m for every $100,000

What are you getting the loan for anyway? is there a good chance that you would sell it before the original 10 year note was finished?

If you went with option one, could you pay extra and get it paid off in 10 years?

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rates are going to go down

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So you want him to pay an extra 1% on the highest principal balances? Rates would have to be several points higher when it balloons to make up that difference. That is assuming he never decides to prepay, in which case he would be wayyyy better off with the balloon note.