What Happens at the End of a Private Mortgage Balloon Payment?
Payments on a balloon mortgage are similar to a conventional fixed-rate mortgage in that the amortized payments remain the same. However, instead of repayment in 30 years, with a balloon payment you are expected to pay the full balance in five to seven years. Until your balloon payment is due, you have the benefit of a lower interest rate, no worries about market changes affecting your interest rate and a gradually decreasing mortgage. As your balloon payment comes due, you have serious decisions to make so you don't risk losing your property.
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Purpose
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When your balloon payment is due, you can find yourself required to pay 25 years of debt all at once. With a balloon payment, five years of payments will not make much of a reduction in the balance, especially since most of the payments go toward interest. Your goal is generally not to reduce the balance; balloon payment loans are used as a short-term solution to manage your finances for five to seven years. During this time, you have an opportunity to improve your credit rating and build payment history to qualify for financing with a better interest rate and terms.
Sale of Property
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Before entering into a balloon payment mortgage, you need to be confident that you will be able to sell your property before the payment is due, because you are relying on the proceeds from the property sale to cover the balloon payment. You are also depending on the property's value to remain the same or increase at the time of the sale. If the value does not at least remain the same, you may end up paying additional funds for the balance of the balloon payment.
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Refinance With Your Existing Lender
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Instead of selling your home prior to the balloon payment becoming due, you may consider refinancing your loan with the same lender, if that is an option. Review the terms of your agreement. There may be a clause where you can automatically convert to a new loan if your balloon payment becomes due and you cannot pay it. However, if you are going to stay with your existing lender, he may have less flexible and higher interest rates because of your financing need.
Refinance With a New Lender
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If you can't come up with the funding on time to make the balloon payment, you could lose your home. Therefore, planning is critical. Even though you may have the paperwork in order with your existing lender and feel a sense of security, keep your options open to refinance your mortgage with another lender. A new lender will see you as a new client and will be inclined to attract you with better terms and possibly a lower interest rate. Try to keep your balloon payment for a short term of five to seven years so you can take the time to build your credit and payment history, plan ahead and refinance in advance of the next due date.
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