Can you refinance a balloon mortgage? Thankfully, you can. Additionally, unless you’re just rolling in money, you might have to refinance. A balloon mortgage is a home loan with a brief term, typically between 5 and 7 years, after which the remaining balance is due in a single, sizable payment, known as a balloon payment. Most people either refinance the loan, convert it to a fixed-rate mortgage, or sell the house before the payment is due because they typically don’t have this balloon payment sitting in a Swiss bank account somewhere.
Being Underwater on Your Home Can Impact Your Ability to Refinance
Refinancing your balloon loan before the payment is due is frequently the best choice, but it’s not always the case. You must obtain a lender’s approval just like any other home loan. Before approving a mortgage, a lender will consider your debt-to-income ratio, credit score, and overall financial health.
Being underwater on your house—that is, owing more on it than it is worth—can make it challenging to refinance a balloon mortgage. Negative equity in your home isn’t a good look because most lenders prefer homeowners to have 20% equity in their homes before approving a refinance.
There are several ways that you can find yourself underwater on your mortgage, but the most frequent is if you bought your house just before a period of sharply falling home values. For instance, if you took out a mortgage for $160,000 on a house worth $170,000 but the value of the house has since dropped to $140,000, you would now be “underwater” on your mortgage. Even if you sold it for its full market value, you couldn’t recoup your costs and would still owe your lender $20,000 for it.
If your balloon mortgage is negatively amortizing (you make monthly payments that are less than the monthly interest you owe on your home), this is another possible way you could end up underwater on your property. In that case, the principal of your loan is increased by the portion of interest that you are not paying. While it may not always be the case, a negatively amortizing loan coupled with a slight drop in home values just might cause a homeowner to go underwater.
What to Do If You Can’t Refinance a Balloon Loan
Call your original lender as soon as you can if you can’t refinance your balloon loan with a conventional lender and you don’t believe you’ll be able to make your balloon payment. If you’re lucky, they might decide that helping you is more advantageous than letting your house go into foreclosure.
In some cases, they might give you an additional five years of limited payments before another balloon payment is due, allowing you to increase your home’s equity and increase your chances of being accepted for a traditional refinance. ).
Alternatively, the Home Affordable Refinance Program (HARP) may be able to prevent you from going into foreclosure if your mortgage is backed by Freddie Mac or Fannie Mae. The program, which has a deadline of December 31, 2018, enables eligible borrowers to refinance their homes without any loan-to-value (LTV) restrictions or the need to acquire additional mortgage insurance.
If you would like to learn more about refinancing a balloon mortgage, fill out the form below and a mortgage specialist will get in touch with you
FAQ
Can you refinance if you have a balloon payment?
Banks are unlikely to refinance the balloon loan if there is negative equity unless the borrower can make the required down payment. The borrower runs the risk of defaulting on the loan if they cannot refinance the balloon loan or make the full balloon payment.
What happens if I can’t pay my balloon payment?
But a balloon mortgage doesn’t come without risk. You might not be able to sell or refinance before the balloon payment becomes due if the value of your property drops, you lose your job, or you encounter another financial hardship. You run the risk of having your house foreclosed upon if you can’t make the payment.
What happens when a balloon mortgage is due?
At the end of the loan term, a balloon payment is a one-time, larger-than-normal payment. If you have a mortgage with a balloon payment, your payments might be lower in the years before the payment is due, but you might end up owing a significant sum of money.
What happens if you can’t refinance your home?
If your application for a mortgage refinance loan is rejected, the lender will send you what is known as an adverse action letter explaining why. You have the legal right to ask the credit bureau that the lender used to check your credit for a free credit report.