A balloon home equity loan provides you with the security of an affordable monthly payment for the first few years. At the end of the loan, the balloon inflates, and you are left to pay off the balance in a lump sum. If you cannot pay, you could lose your home. There are several methods you can use to pay off your balloon home equity loan early.
Contact Your Lender
Contact the lender to explore your options. Ask if you will be responsible for a prepayment penalty if you choose to pay off the loan ahead of schedule. If you know you will not have the money to pay off the lump sum, discuss renegotiating the terms of the deal. The lender may allow you to refinance the remaining balance or extend the payment time. If the lender makes a refinance offer, ask to get it in writing.
Make Larger Payments
If you want to reduce or eliminate your balloon amount, make larger payments consistently. Although a higher payment eliminates the benefit of a balloon mortgage, you will pay off the loan early. The amount you will need to increase your payment is based on the principal, interest and term.
A balloon amortization calculator can help you figure out just how much you will need to pay. For example, if your equity loan is for $50,000 with 6.5 percent interest for five years, your monthly payment is $316.03 a month with a balloon payment due of $46,805.77. If you want a zero balance at the end of the five-year term, you will need to pay $ 978.31 a month instead.
Take Out a Loan
Take out another loan large enough to pay off your balloon equity loan. Although an additional loan will not get you out of debt, it allows you to get out of the balloon loan early. When applying for another loan, the lender will take your home equity loan debt into consideration, along with any other payment obligations you have.
If you want to consolidate multiple debts, a debt consolidation loan might be an option for you. Shop different lenders and get quotes to determine the right choice for your situation.
Refinance the Loan
If you cannot afford the high payment at the end of the term, refinance to pay off the current loan. Depending on the equity in your home, you might even want to consider refinancing the mortgage and home equity loan into one payment.
Because the benefit of a balloon equity loan is smaller payments in the first few months of the loan term, expect your monthly payment to increase. You will also have to pay closing costs and other fees associated with refinancing the loan.
- Federal Trade Commission: Home Equity Loans and Credit Lines
- NOLO: Home Equity Loans and HELOC Basics
- FinancialWeb: The Pros and Cons of Balloon Mortgages
- Balloon - Wikipedia
- Consumer Financial Protection Bureau. "What Is a Balloon Payment? When Is One Allowed?" Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "What Is Negative Amortization?" Accessed March 15, 2020.
- Experian. "How Does Refinancing a Mortgage Work?" March 15, 2020.
- Federal Reserve History. "Subprime Mortgage Crisis." Accessed March 15, 2020.
- IRS. "Recourse Vs. Nonrecourse Debt." Accessed March 15, 2020.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.