Are you thinking of selling a home with a balloon payment? This is a viable option if you’re unable to pay off the principal.
A balloon mortgage can seem like a dream come true in the beginning. Purchase the home of your dreams with small monthly payments and a low interest rate. But there’s a huge catch. At the end of the short lending term, you have to pay the remaining principal in one giant lump sum.
This can be tens or even hundreds of thousands of dollars. If you can’t afford to make the payment, you have a number of options, and selling the home is easier than you might think.
Why Buyers Choose a Balloon Mortgage
The main reason for the popularity of balloon mortgages is obvious: low payments, low interest. But because the bulk of the principal (or in some cases the entire principal) has to be paid at once, balloon mortgages aren’t right for a majority of buyers.
Buyers who opt for a real estate balloon mortgage typically have a strategy for doing so. Either they already have the money to cover the balance or they’re expecting that they will have the money available in the coming months or years—perhaps due to a lucrative business venture, a forthcoming inheritance, or savings that are currently accumulating. The low upfront payments allow them to enjoy some financial comfort in the interim period.
Why Balloon Mortgages Are Often a Bad Idea
Unless you expect to have an extra $100,000 to $200,000 on hand within the next few years, a balloon mortgage is a terrible financial choice. At the end of the 5- to 7-year mortgage period, you’ll be required to pay the remaining balance in what’s known as a balloon payment.
Let’s say, for example, that you purchased a modest home for $250,000 and you make monthly payments around $1,100. With a 7-year loan term and a 3.5% interest rate, you’ll have to cough up more than $213,000 at the end of your mortgage period. This isn’t realistic for the average buyer.
What to Do When You Can’t Afford to Pay Off Your Balloon Mortgage
If you already find yourself in this situation and you can’t afford to make the final payment on your balloon mortgage, the good news is that you do have a few options.
When you can’t afford to make the balloon payment, one of the most common solutions is to refinance your mortgage into a traditional 15- or 30-year loan. This will put you right back at square one in terms of paying off your mortgage, but at least you’ll get to keep your home.
Unfortunately, lenders aren’t always open to this option—particularly if the home has decreased significantly in value, if your credit is less than stellar, or if you own very little equity in the home (which is very common with a balloon mortgage). Additionally, you can expect a much higher interest rate and a higher monthly payment if the bank does allow you to refinance.
Extend the Mortgage
If you don’t qualify for a typical refinance, your lender may allow you to extend the mortgage at your current interest rate. In order to qualify for this extension, you’ll usually need to be current on the mortgage. You also can’t have any late payments documented within the past year.
This option varies from lender to lender, so you’ll need to speak with your loan provider and find out if this is possible for you. Explain the situation to the lender; they may have their own terms or program that will enable you to keep the house and continue making payments.
Sell the Home
If all else fails, you always have the freedom to sell. From there, you can invest in a new home with a traditional 15- to 30-year loan, or you can rent a home until your financial situation becomes more stable.
When you sell your home, the value rolls over into the buyer’s mortgage, and you’re no longer responsible for making the balloon payment. There are no penalties, and the only real disadvantage is that you’re likely to have less equity than you would have with a traditional loan—unless your home has increased significantly in value since you purchased it.
Selling a Home With a Balloon Payment
If you have a real estate balloon mortgage, the selling process isn’t much different than it would be for a home with a traditional loan. You can work with a realtor to list your home in the MLS and negotiate with prospective buyers, or you can opt for an auction or For Sale By Owner (FSBO) arrangement.
The sale only becomes complicated if your balloon payment is nearing its due date, is already due, or is past due. In this case, you may be in danger of pre-foreclosure. You can still sell the home in most cases, but you’ll need to opt for a short sale. If you work with a real estate investor and sell your house for cash, you can complete the sale in a matter of weeks or even days—as opposed to the months required for a traditional real estate transaction.
At Get Fair Home Offers, we buy houses for cash in California. We can help you sell your home quickly and get rid of that looming balloon payment once and for all. We’ll make an all-cash offer on your home in as little as a day or two, and we’ll take care of the whole closing process. If you accept our offer, we can have you out in as little as a week with cash in hand. To learn more, give us a call at (626) 817-3351.