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HELOC Balloon Payments: How to Find a Way Out
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If your home is worth more than your mortgage balance, a home equity line of credit could help with other financial goals. Typically you can draw on the HELOC for 10 years before the repayment period starts. You might also be eligible to make interest-only payments during this time.
Some HELOCs have a balloon payment feature. Like a balloon mortgage payment, a HELOC balloon payment is at least twice as much as a regular monthly payment. But it might also be tens of thousands of dollars — a lot of money to come up with all at once.
7 ways to get out of a HELOC balloon payment
There’s no one-size-fits-all solution to avoid a HELOC balloon payment. It depends on your personal financial situation. Below are some options.
- Pay off your HELOC in cash
- Refinance your HELOC
- Use a balance transfer
- Take out a new loan
- Make bigger payments now
- Ask for help
- Borrow from your 401(k)
1. Pay off your HELOC in cash
Paying before the balloon payment comes due is a pretty obvious tactic. If you’re fortunate to have enough cash in hand to retire the HELOC balance, this could be the right move for you.
Tom Oviatt, a loan originator in the San Francisco area, cautions that homeowners should be wary about taking too much out of savings. That’s because if something unexpected happens, such as illness or job loss, they may need the money for basic expenses such as mortgage, utilities and food.
“I’m all about preserving your cash,” said Oviatt, of Wymac Capital Inc.
As you decide whether to pay off a HELOC early, weigh the benefit of being loan-free with the potential downside of being cash-poor.
2. Refinance your HELOC
Can you refinance a balloon payment HELOC? Yes. Like other mortgage products, a HELOC is a second mortgage on your home and could be refinanced.
Replacing a balloon payment HELOC could potentially improve several aspects of your finances:
“Ten years will be here quicker than you think. That balloon payment in the future, you’re going to have to deal with it,” Oviatt said.
There’s more than one way to refinance your HELOC:
Request a loan modification
Because you’re an existing customer, the lender might be willing to reduce the interest rate, extend your repayment period or even reduce your principal balance. Or you could ask about converting it into a fixed-rate HELOC; since the payment won’t change over time, this could make it easier to budget the payoff.
There’s no guarantee the lender will agree to do any of those things. But it doesn’t hurt to ask.
Apply for a new HELOC
A new HELOC will delay the repayment period, which could result in lower payments for a time. It also has lower upfront costs than other refinancing tactics.
On the other hand, the HELOC’s variable interest rate can go up, and over the long run you’ll pay more because of additional interest payments, fees and closing costs.
Apply for a home equity loan
A home equity loan uses the equity in your home as collateral. Unlike a HELOC, it has a fixed interest rate and you start making payments on both interest and principal immediately.
While its payments are typically lower over the loan’s term, you’ll have to pay closing costs and fees — and since you’d already paid interest on the original HELOC, this means more interest in the long run.
Refinance the mortgage
It’s possible to refinance your mortgage and the HELOC into a brand-new mortgage loan. This would mean a fixed interest rate, and if you were eligible for a lower interest rate, that could reduce your monthly payments.
However, keep in mind you will likely pay more interest overall because you’re now paying for a longer term.
Apply for a cash-out refi
It could be possible to obtain a cash-out refi: a new mortgage whose loan amount is greater than what you currently owe. You get the difference in cash, which would allow you to pay off the HELOC — that is, if the cash out is enough to cover the balance.
There’s a possibility that the HELOC lender might be able to block the cash-out refi. And you could wind up paying more overall, for two reasons:
- Closing costs and fees
- The possibility that refinancing reduces your equity to less than 20%, which means the lender might require you to buy private mortgage insurance.
3. Use a balance transfer
If your HELOC balance is relatively low, you might be able to transfer it to a credit card that offers 0% interest on balance transfers for a limited amount of time. Generally that’s six to 21 months, depending on the card issuer.
For that reason, you need to have a good budget and be sure that you can pay the entire balance in full by the end of the promotional period before going down this route.
4. Take out a new loan
If your existing HELOC balance is not too high, you might qualify for a personal loan with a fixed interest rate. Typically a personal loan doesn’t require collateral, which means you won’t be using your home’s equity to qualify.
“A credit union might be willing to work with you on a personal loan,” said certified financial planner Delia Fernandez, who’s based in Los Alamitos, Calif.
Another strategy is to look for a loan online. Compare the interest rates and loan terms carefully before you decide to borrow.
5. Make bigger payments now
For some people, the whole point of a HELOC is to be able to pay for a big-ticket item — kitchen remodel, new HVAC system — in small monthly increments. But if you’re haunted by the specter of a balloon payment down the road, try making larger payments now.
Use an online mortgage calculator to find out how much extra each month to pay. Enter the amount of your loan, the remaining length (term) and the interest rate. Even if you can’t eliminate the balloon payment this way, you could greatly reduce its size.
6. Ask for help
If none of the above options work, you might be eligible for help from the U.S. Department of Housing and Urban Development’s assistance program.
For more information, call the Consumer Financial Protection Bureau at 855-411-2372 and ask to speak to a HUD-approved housing counselor.
7. Borrow from your 401(k)
Some people recommend a 401(k) loan as a way to pay off your HELOC, but this is not generally a good idea.
Besides, your 401(k) is a retirement account, not a piggy bank. Taking money out to pay off a HELOC reduces future gains.
While a 401(k) loan is available as a last resort, it’s generally better to exhaust all other options first.
How does a balloon payment work?
As noted above, a balloon loan is one with a payment at the end that’s more — maybe much more — than previous installments. Balloon payment loans carry two major risks.
First, you might not be able to make the HELOC balloon payment when it comes due, even if you’ve been saving for it. Something unexpected, such as divorce or serious illness, could have used up some or all of that cash. The HELOC payment shock of having to cover the usual monthly obligations plus a potentially huge balloon payment could leave your finances in shambles.
Second, although it’s possible to refinance a balloon payment loan, there’s no guarantee you’ll be able to do this. For example, if the home has lost value, you may not have enough equity to qualify for refinancing. And if your credit score has dropped, you might not be eligible for a new loan, or for favorable interest rates.
When possible, paying off a HELOC before the balloon payment comes due could be the right choice.
Balloon loan FAQs
Can I refinance to avoid a HELOC balloon payment if I have bad credit?
Possibly. However, you’ll likely need more home equity, more income and less debt than you would if you had good credit.
Talk to a number of lenders to check their requirements.
Can I avoid a HELOC balloon payment in the first place?
Not all HELOC offers come with balloon features. And if the first one or two you see have balloon payments? “Keep shopping. There’s better deals out there,” said Fernandez.
Turns out my HELOC has a balloon payment — now what?
Try some of the tactics noted above to refinance or to pay the HELOC off early.
Don’t put this off. The sooner you get started, the more time you’ll have to weigh all the options and reduce your chances of being saddled with a high payment you can’t afford.
Does making interest-only payments affect a HELOC balloon payment?
It’s often possible to make interest-only payments during the “draw” period of the HELOC — the time when you can access the cash. (Usually that’s 10 years.) Doing this means the principal doesn’t get any smaller, which could affect the size of the balloon payment at the end of the term.
Interest-only payments may also lead to HELOC payment shock once you have to start paying back both principal and interest along with your usual monthly expenses.
Is a balloon payment loan ever a good idea?
Maybe. For example, a balloon payment mortgage might be a good fit for investors who want to rehab a property and then sell it quickly. In some cases it might also work for would-be homeowners who want to buy right away and pay the loan off quickly with an expected cash windfall.
For most consumers, however, a balloon payment mortgage is a big risk. And as noted, a balloon payment HELOC may stress your budget. If you can find a way out that makes financial sense, consider doing so.