If you have a balloon payment coming you may be looking at refinancing your mortgage as soon as possible. Most homeowners consider signing on to a mortgage agreement consider a balloon installment risky and therefore would never get a mortgage like that.

The reality is that these types of mortgages can be a good thing if the homeowner or property owner believe that that they will be selling their property fairly soon if the real estate market appreciates quickly.

Balloon payments are nothing to fear as long as the market is hot and you will be making great money in the very near future, but if the real estate market depreciates and you can’t sell your house for what you borrowed on it, or your house value has dropped below what you paid for it, you have problems.

This is why you need to refinance your home with a different lender or mortgage broker as soon as possible so that you can pay off your first lender and escape the balloon payment.

Balloon Payment Coming Need to Refinance?

One of the tips we always try to mention on CLF is considering your personal inflation rate long before you consider getting a mortgage that has a balloon payment down the road. Why? Because your personal inflation rate will dictate how much money you will have in the future for inflated payments at the particular interval in the mortgage term.

In simpler terms, if you see that your expenses (due to your lifestyle) are going to be much greater than they are presently, compared to when you apply for your mortgage, then you never want to be dealing with a large increase in your mortgage payment or installment.

If you have made the mistake of not considering your personal inflation rate, or the possibility of a downturn in the real estate market, than refinancing may be your only option left.

You should first talk to your bank where you got your mortgage and ask them if they will refinance all terms of the mortgage so that you can avoid the balloon payment on the horizon, and if they see a way where they can make profit with the APR on the ARM then they may actually go for it. If your bank or broker will not cooperate in your goal then you will have to go to a bank completely outside of your existing agreement.

Some online lenders do provide mortgage refinancing but you have to be careful that the APR is low enough on the ARM to make it worth your while. Furthermore, you want to make sure that this new lender is not behaving like a predatory lender and sneaking in clauses that will create a bigger problem for you than you already have.

Make sure that if you are refinancing your mortgage using an ARM that the ARM is based on the LIBOR index and not the COFI index. Whatever you do make sure that your refinancing terms do not include a payment increase later in the term. I have actually seen this happen before with clients who were desperate to refinance and avoid the sting of a balloon payment and end up in much worse shape than they already were in.

Many other people that I have spoken with who are in your situation have ended up having to take out a second mortgage and do upgrades and/or renovations to their property as soon as possible so they could sell our home for as much money as possible, get out of the mortgage, take the hit (or loss), and move on. Usually these investors I’m talking about were not dealing with their home mortgage but instead they were speculators flipping properties.

Property Speculators Don’t Fear the Balloon

Speculators who try to leverage their existing equity will often buy properties just to renovate and flip taking advantage of a hot real estate market, or sometimes a lukewarm real estate market.

These house flippers and/or property investment speculators have no problem taking a mortgage with a bank using a COFI based index rate that don’t have periodical rate hike caps (like the LIBOR based rate usually does) and do have future balloon payments. They know that they plan to sell long before the big inflated payment is due and long before the ARM will have a costly interest rate hike.

Sometimes homeowners who are not flipping houses will choose (unfortunately) to take a mortgage that has lower monthly payments in the short term but have a balloon payment later and they just hope they will have the funds at that time. Usually they don’t.

Try not to make that mistake. If you do and need to refinance there are plenty of different options online that you can choose from. Take your time and choose wisely, and perhaps read our article on how to plan for a new mortgage before applying.