Can You Refinance a Balloon Mortgage?
Refinancing a Balloon Mortgage
Can you refinance a balloon mortgage? Thankfully, you can. And unless you’re simply rolling in dough, you may be forced to refinance. A balloon mortgage is a home loan with a short term, often 5 - 7 years, after which the rest of the loan is due in one large payment, called a balloon payment. Since most people don’t have this balloon payment sitting in a Swiss bank account somewhere, they usually either refinance the loan, convert the loan to a fixed-rate mortgage, or sell the home before the payment is due.
Being Underwater on Your Home Can Impact Your Ability to Refinance
While refinancing your balloon loan before the payment is due is often the smartest option, it’s by no means guaranteed. Just like with any other home loan, you’ll need to be approved by a lender. A lender will look at your debt-to-income ratio, credit score, and overall financial health before deciding to go forward with the mortgage.
One thing that can make it difficult to get a balloon mortgage refinanced is being underwater on your home, meaning you owe more on the home than it’s worth. Since most lenders like for homeowners to have 20% equity in their home before approving a refinance, having negative equity in your home isn’t a great look.
Going underwater on your home can happen in several ways: the most common is if you purchased your home right before a period of steeply declining home values. For example, if you took out a $160,000 mortgage on a house valued at $170,000, and the house’s value has now declined to $140,000, you now would be “underwater” on your home. Even if you sold it for full market value, you wouldn’t be able to recoup your expenses, and would still owe $20,000 to your lender.
Another way that you can potentially become underwater on your home is if your balloon mortgage is negatively amortizing (you make monthly payments that are less than the monthly interest you owe on your home). In that case, the part of the interest that you aren’t paying gets added to the principal of your loan. While this may not often be the sole reason for a homeowner going underwater, a negatively amortizing loan combined with small decline in home values just might.
What to Do If You Can’t Refinance a Balloon Loan
If you can’t refinance your balloon loan with a traditional lender, and you don’t think you’ll be able to make your balloon payment, you should call your original lender as soon as possible. If you’re lucky, they may deem helping you out more beneficial than allowing your home to go through foreclosure.
In some cases, they may offer you another five years of limited payments before another balloon payment is due, during which you may be able to build more equity in your home (and therefore be more likely to get approved for a traditional refinance.)
Alternatively, if your home loan is backed by Freddie Mac or Fannie Mae, the Home Affordable Refinance Program (HARP) may be able to help save you from foreclosure. The program, which expires on December 31, 2018, allows qualified borrowers to refinance their homes, without any loan-to-value (LTV) limits or the requirement of taking on additional mortgage insurance.