Balloon mortgages do just what the name implies: balloon to a large payment at the end. If you can't make the final payment, which you agreed to do when you signed your loan papers, you could lose your home. Luckily, you don't have to walk away just because you have a balloon payment you can't afford. Act as soon as you realize you're in trouble to prevent a financial disaster.
Know what your balloon payment is and when you have to cough up the cash. After that, you can decide what your real options are. What you can do revolves around your credit, so get your credit reports and check out your current score. If you've got old, outstanding bills, pay up to clear these red flags to lenders off your report.
If you've got good credit or can get a co-signer who does, try to refinance your balloon mortgage. Refinancing is when you get a new loan to pay off the old one. Instead of another balloon loan, go with a fixed-rate mortgage. If you've got a traditional fixed-rate loan, you won't be stuck in this situation again, and your payments will remain stable for the entire loan. Since refinancing takes time, get the ball rolling as early as possible. Don't wait until a few weeks before your balloon payment is due. Start getting loan quotes from lenders months in advance. You don't have to use the balloon lender for your new loan.
If you know you can't make the payment, you can sell the house. Since most of your money went to interest, don't expect to make a lot money off the sale. But at least you might get enough to pay off the mortgage and avoid foreclosure. How well you'll do depends on whether your home's value has held, improved or declined and what you owe on the mortgage. As with refinancing, you've got to get the ball rolling early. It could take months to find a buyer and close the deal.
Even if you can't get enough money to cover the loan from a sale, the lender might take less. This is known as a "short" sale. In a short sale, you sell the home for a price that's less than what you owe, the lender accepts the money and you're off the hook for the loan. You might have to pay taxes on the money the lender forgave, and you still have to find a real estate agent to market and sell your home. Keep in mind that if you can't sell it at a price the lender will approve, you'll still face foreclosure.
Filing for bankruptcy will temporarily protect you from lender action if your balloon payment is due, but it won't change the fact that you owe the payment, no matter which kind you file. If you're keeping your home, you have to make the balloon payment during your bankruptcy case. Your lender can get permission to foreclose from court if you can't come up with the money.
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