How to get out of the balloon mortgage?

Borrowers often plan to get a balloon mortgage, but it may not be the best option. It seems a convenient alternative to pay the loan, but until you make the final payment.

If things don’t work up as you think of, the situation can get complicated, and you may end up with a bigger loss.

If you want to know how to get out of the balloon mortgage, keep reading this guide!

What is a balloon mortgage?

A balloon mortgage is a loan that you pay with a large final and single payment. It is opened with the assumption that you will have enough money to make the principal payment at the end of the term.

Unlike the traditional mortgage, where you make fixed monthly payments to clear your debt gradually, you only have to make small monthly payments that are not enough to clear the loan. The loan is removed with the final principal payment.

Balloon mortgages have shorter terms to make the payments than traditional mortgages that can extend up to 15-30 years.

Why one would consider a balloon mortgage?

There could be many reasons for which one can choose to open a balloon mortgage. The two obvious reasons are:

• You may have the mindset of saving a lot of money for the next few years to get the home of your choice.
• You might be expecting a lump sum amount from your business, inheritance, or by selling a property and decide to go for a balloon loan.

Ways to get out of the balloon mortgage

Things always don’t work the way we expect. Certain complicated situations can arise that may prevent you from making the final payment. If such a situation comes, you can try the following methods to get out of the balloon mortgage:

Contact your bank

Before your due date, you will most likely get the idea of whether you would be able to pay off your loan or not.

If you are unable to pay, contact your bank and explain the whole situation and provide the details of your financial situation. Depending upon the condition, they may modify your loan or demand full payment at the due date. 

If you were responsive throughout the tenure, your bank might allow you some modifications. In this case, they may extend your loan limit up to 6 months or 1 year or reorganize all the terms. Most often, when the borrower is consistent with his payments, the bank converts the loan to full amortization i.e. 25 years loan.

Refinancing

Another option to pay off the balloon loan is by taking another loan known as refinancing. The new loan will extend your repayment time up to 7 years or 15-30 years in case of amortization.

For getting a new loan, you should be qualified. So, if you think of refinancing, you must have a good income, bank balance, and assets. If your financial situation is satisfactory, you have to look for the banks that offer special work-out-financing.

If you chose to refinance through a long-term loan, you have to pay a significant amount in the form of interest. Expectantly, interest rates are the same as for the original loan or maybe lower. If not, you should choose the conventional amortizing loan.

Sell your assets

If you don’t want to refinance, you can choose to sell your asset to pay off the balloon mortgage. It can be your home or car that you bought with the loan or some other valuable asset.

If you decide to pay off with your mortgage property, be prepared to find that your assets will be priced at lower rates than market rates due to mortgage issues.

Bottom line

If you have decided to get a balloon mortgage, you should also plan for making the inevitable final payment. Instead of leaving the matter, work out the things before the due date and be prepared for the final payment.