What if I Can't Refinance to Pay My Mortgage Balloon Payment?

There was a time in the United States when balloon mortgages were the norm. Loan terms were short, perhaps 10 years or less. Monthly payments were either interest-only or otherwise quite small, sometimes nothing at all. At the end of the term, the entire outstanding balance on the loan came due.

In time, the popularity of these mortgages gave way to longer-term, fixed-rate financing whereby the loan balance is paid off in equal amounts over a 30-year, for example, period. Each of these options has pros and cons, but the majority of borrowers view the fixed-rate mortgage as safer.

What Makes Balloon Mortgages Risky?

In fact, balloon mortgages are not all made the same. Sometimes, the rate is fixed while other balloon rates are variable. The common element is that the bulk of the loan is due and payable on the last month of its term.

On the one hand, there are advantages to this arrangement, especially if you are expecting to live in a house for a shorter time period. This way your cash flow benefits from low-to-no monthly remittances while the balloon is paid off at the time of re-sale, if all goes well, that is.

The flip-side of balloon loans is that the borrower amasses no equity in the subject property. Therefore, the onus is on the re-sale to satisfy the debt. The sale price must be sufficiently high to satisfy the obligation, a condition that may or may not be in effect at the desired time. Other borrowers might pin their hopes on their consistently generous bonuses given by employers annually.

Both of these variables often require a strong economy and robust real estate market to come to fruition. If things sour, personally or in general, you may have a balloon mortgage due and can't refinance. What, then, are your options?

Loan Modification Balloon Payment

A loan modification is not a refinance. With the latter, the bank replaces an old loan with a new one. A modification, on the other hand, occurs when the bank alters the loan terms to make it easier for the borrower to maintain regular payments. Elements of the modification could include a lower interest rate, extending the term out in order to lower monthly remittances, a curtailment of the principal owed or even a forbearance of non-payment for a fixed number of months.

Prior to granting the modification, the lender will evaluate the circumstances motivating the request as well as the capacity of the borrower to sustain payments under new terms. Lenders do not like foreclosure any better than borrowers; they may be amenable to modification for those with a balloon mortgage due and can't refinance.

Refinance the Balloon Mortgage with a Co-Signer

If job loss, emergency bills or other circumstances have impeached your credit rating and increased the burden of your debt relative to income, a co-signer can mitigate a bad application with excellent credit scores and a low debt-to-income relationship. This can get the refinance needed to continue in the house under better terms.

Agreeing to co-sign puts a friend, relative or colleague on the hook if you default. Ahead of any co-sign arrangement, make sure to have an honest discussion with the prospective loan guarantor about how you intend to keep up on payments and eventually pay the mortgage off.

Read More​: What is Mortgage Refinance?

Selling the House or Foreclosure

You can sell the house for less than the appraised value for the sole purpose of paying off the loan. Alternatively, you can allow the bank to initiate foreclosure.