Balloon Mortgage: Why You Must Never Let a Lender Sell You a Balloon Mortgage
by Mogamahttp://mogama.info
The primary mortgage was an interest-only loan, with the rate locked for five years. The Browns took the deal because the low house payment of about $500 per month. And since they were certain they would make extra payments towards the principal loan, they had no doubt this was a sweet deal.
Mr. & Mrs. Brown didn't even pay much attention to the fact that their mortgage was a balloon: the whole balance on the mortgage would have to paid in full at the end of five years. If not, they'll have to refinance, and that would mean a brand new loan, equipped with loan application fee, appraisal fee, and all the other fees and charges that add up to nearly $2,000 of closing costs.
The Browns signed the mortgage contract, feeling pretty good about getting a steal of a deal. They also found out later that there was a prepayment penalty if they wanted to refinance before five years.
There was one problem: The Browns, like all other human beings, were not in control of future events.
Needless to say, their plans and intentions did not exactly line up. While they managed to pay off the second mortgage for a 20% equity in their home, they were unable to significantly pay down the primary mortgage. Not only that, but due to one major bad investment they had to borrow against the home, using a Home Equity Line, which I call “HEL minus L”.
Before long, the five years were up, and the moment of truth had arrived. The Browns were at the complete mercy of the lender. The same mortgage officer hurriedly assured them of another sweet deal, but upper management stepped in and said No Deal, even after the Browns had received a Good Faith Estimate (GFE) in the mail from Republic Bank.
The Browns were decimated. They felt like foreclosure was breathing down their throat, that the bank was forcing them to foreclose. They shopped around at other banks, but every lender considered their loan to value unacceptable. Their income did not measure up. They did not have enough equity in the house. And due to the bursting of the housing, the value of their home had dropped precipitously.
They scrambled and borrowed $10,000, which they paid down on the principal of their matured loan. This new debt had dealt a setback to their goal of becoming debt-free but the mortgage in five years.
The worst part of the ordeal was when Republic Bank finally structured a new loan for the Browns, it happened to be another balloon! This time, it was a three-year balloon, armed with prepayment penalty. That meant they would pay about $2,000 as prepayment punishment, if they dared to move the loan to a different lender before the three years were up. After much pleading, the bank agreed to a five-year balloon, but they totally refused to offer a 30-year mortgage with a much lower monthly payment.
BTW, the fact that the Browns had good credit, had been loyal customers of Republic Bank for years, and had never been late on their mortgage payment did not make any difference to this lender.
The new mortgage payment was doubled what the Browns were paying before. The Browns were left with little choice but to put their beloved home up for sale. But to add fuel to fire, when the realtor showed them the CMA (Comparative Market Analysis), he found their house was worth at least $14,000 less than what they had hoped. Selling became a very unattractive option now.
Lesson? Never ever sign a note for a balloon mortgage on your house. It's a bad loan from start to finish, with the lender getting everything they can ever wish for, but the borrower holding the bag filled with rotten disappointments.
Article submitted Tuesday, February 09, 2010 & read 224 times.
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