Suppose you bought your home two years ago and the seller financed your purchase by carrying back a second mortgage for two years. That "short-fuse" mortgage's balloon payment is now due. You were hoping mortgage interest rates would drop so you could refinance. But they went up instead. What should you do to avoid losing the house?
If you're like most homeowners with mortgage balloon payments coming due, you haven't saved up the cash to pay the balloon payment. However, there are many other ways to solve the problem.
Your first and easiest solution is to contact the current lender several months before the balloon payment will be due. Ask if the lender would like to extend the mortgage for several years.
If you've made your payments on time with no hassle, the lender may have grown accustomed to the steady income and may be willing to extend the mortgage. You might have to sweeten things a little by offering to pay down the loan balance slightly or raise the interest rate.
A related alternative is to ask your current lender to "walk the mortgage" to another property you own where the lender's security would be greater. Moving the second mortgage to another property, plus either raising the interest rate or paying down the balance a little, may be what it takes to get the lender to extend the loan a few years.
If your lender refuses to extend the mortgage, then you'll need to borrow from a "hard money" cash lender to pay the balloon payment. The first lender to approach is the one holding the first mortgage on your house. Many lenders owning low-interest-rate first mortgages, especially S&Ls and banks, are anxious to refinance these old loans. Most will do so at below-market interest rates to get rid of their old mortgages.
For example, suppose your first mortgage is 9 percent. The lender may loan you the cash you need to pay off your second mortgage and charge you 12 or 13 percent on the entire balance. That's below the 16 percent "going rate" for new first mortgages and an affordable new first mortgage for you. In return, the lender gets rid of the old low-interest-rate loan.
If you plan to sell your home, refinancing the first mortgage to increase its balance at a reasonable interest rate can make your house more salable. Of course, be sure the refinanced mortgage can be assumed by your buyer without change of the affordable interest rate.
But before refinancing the first mortgage, consider borrowing on a new second mortgage instead. The new second mortgage can pay off your old second mortgage.
It may be cheaper to leave the old low-interest-rate first mortgage undisturbed even though the second mortgage will cost about 18 percent plus loan fees. Sources of second mortgages include finance companies, credit unions, S&Ls, banks, individual lenders and mortgage brokers.
Another alternative is to sell the property to raise cash to pay off the second mortgage. But in today's market you'll probably have to carry back a second mortgage to get the property sold, just as the previous owner did for you. Few buyers are eager to purchase with a new first mortgage at interest rates of about 16 percent, so don't expect an all-cash sale.
A better alternative to selling the house, unless you really want to sell, is to sell a partial interest to an investor-partner. The investor's payment to buy a share of your house can be the amount needed to pay off the second mortgage. Or it can be more.
Logical investor-partners include friends and relatives. However, keep the transaction on a business basis. Put everything in writing to avoid misunderstandings. For example, if you agree to sell the house to repay the investor and split the profits, use a written agreement setting the sale date, perhaps in five years.
Whether you renegotiate the mortgage, refinance it, take on an investor-partner or sell the house, it's smart to plan ahead for your mortgage balloon payment.