Exit Strategy for Mortgage with Balloon Payment
by Charlie from New Hampshire
Ask Kate about an exit strategy for mortgage with balloon payment: Charlie's mortgage is in a bind. The bank is going to foreclose. Both the 2nd and 3rd mortgages have balloons that will soon be due or the payments will go up to $1500 on top of the 1st mortgage payment. Read about Charlie's options other than bankruptcy and foreclosure.
Ask Kate: They're Going to Take My ome By Charlie from New Hampshire
Good evening to everyone on here and happy holidays,
I certainly hope there is a way out of this mess that was started many years ago.
I purchased a home 10 years ago, now I have 3 mortgages against the current home I live in. The original one for 50k with the bank who holds the deed to my home.
The second and third one are held with a completely different bank. The second and third ones are the ones that are coming due this coming year and the following.
I've only been paying the interest on the second two loans for the past 10 years, I have no idea how I'm going to pay the monthly payments, which will be in excess of $1500 a month.
I do have excellent credit but the reason I took advantage of the no-income-verification loan in the first place is that my income is exactly that, mostly a cash business.
I do own another rental property which is completely paid off but isn't worth much.
My live-in boyfriend is a Veteran but has a bad credit score and doesn't make much money.
I'm just trying to see what my options are here and if I should consider bankruptcy? Thank you so much, in advance for all of your suggestions and advise.
Kate's Answer: They're Going to Take My Home
A mortgage with a balloon payment does not fully amortize over the course of the loan.
This means the required monthly payments are not sufficient to pay off the loan, leaving a good chunk of change to be paid upon maturity.
But here's the kicker. The date of maturity rolls around far too early for most homeowners to have saved enough money to satisfy the balloon payment.
Example: Home Loan with Balloon Payment
Let's start with a 30 year fixed rate mortgage of $400,000 at 4 percent. In this example, principal and interest (fully amortized) payments would be $1909 a month.
But let's say that payment stretches a borrower's budget. So the lender instead offers interest-only payments which come to $1333 monthly, almost $600 less.
At first glance, this seems like a screamin' deal. But, stop to think about it. Eventually, the mortgage must be paid off, right?
Well, this is where the balloon trouble enters the picture. A balloon is a required lump sum payment, often due after 5 to 10 years of interest-only payments. What determines the size of the balloon? However much is left owing on the note.
So the bottom line is that you must have an exit strategy when you apply for a balloon payment, whether is be attached to a 1st, 2nd, or 3rd mortgage. (More on this in a moment.)
Pay Attention to Mortgage Jitters
Most borrowers, even when enticed by the lower payment, will initially express jitters over owing thousands of dollars in 5 to 10 years.
But invariably, the lender dismisses their concerns by suggesting that they can merely refinance the mortgage before the deadline.
Well, this suggestion assumes the borrower will maintain steady, well-paying employment, a good credit standing, manageable debt, and a home in good repair.
That's a lot of variables when your homeownership, credit, and finances depend on a refinance to avoid foreclosure.
Create Exit Strategy for Mortgage with Balloon Payment
Interest-only programs are tempting because of the low monthly payments. They allow homeowners to borrow more while keeping the mortgage payment within their budget.
But on the flip-side, a balloon payment that's swiftly reaching maturity can spell disaster. So before accepting a lender's offer for a 1st or 2nd mortgage with a balloon payment, decide how you will eventually pay it off.
If you think that refinancing the mortgage to pay off the balloon will always be an available solution, keep in mind that home values can go down. Decreasing real estate values can often throw a refinance into a tailspin that only a boatload of cash can end.
So you'll also to need to create an aggressive savings plan in the event of a low appraisal.
How to Avoid Mortgage Crisis
Instead of depending on a refinance to solve a balloon crisis, I'd suggest another plan. It's actually quite simple...
- Borrow within the confines of a written budget.
- Borrow for a shorter amount of time.
- Pay off a mortgage more quickly by beating the bank at their own game.
Cross Collateralization and Other Lender Negotiations
I realize at this point that I am singing to the choir because you already have a balloon payment mortgage. In the future, you can make better choices. But for now, you need to enter damage-control mode.
For this, you'll need to put on your negotiator-hat. Even though your rental might not be worth a ton, consider offering it to the 1st and 2nd/3rd mortgage lien holders as cross-collateralization in return for refinancing the three mortgages (including the balloon payment) into one home loan.
There's risk in this because if you can't make the payment on your residence, the lender has the right to foreclose on both properties. So you'll need to decide if this is in your best interest. Read more at How to Use Cross Collateralization in Lender Negotiations
Ask for a HAMP
or in-house modification
to gain access to the 2MP program. There is risk in this also as a modification of the 1st mortgage might result in inferior terms and yet you still might not qualify for 2nd and 3rd mortgage loan modifications. Even so, it could be a worthwhile option to explore. Read about the 2MP program here
As a last resort, call your loan servicer about real estate short sale
and deed in lieu of foreclosure with HAFA assistance
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