Most commercial mortgages, and many residential mortgages, contain balloon language. Even though the monthly payments could be based on a fifteen year or longer amortization, the obligation is now due and payable and the outstanding principal balance must be paid in full. What should you do as the borrower if you will not be able to pay the full balance at maturity?
At least six months prior to the balloon date, the borrower should be speaking with the current lender. Will the lender be interested in modifying and extending the mortgage at maturity? Is so, what will the new interest rate be and will there be any other new terms of the loan? Will the lender require a principal paydown as a condition of the extension, or any additional collateral? In most circumstances, obtaining an extension from your current lender will be the easiest and likely least expensive solution.
While speaking to your current lender in advance of the balloon date, I recommend that you also speak with other lenders about refinancing this debt. Not all lenders are created equal; loan terms, interest rates, fees, and conditions differ among lenders. Ask around, shop for the best terms, and compare.
If the loan has ballooned and your lender is unwilling to grant a long term extension, ask for an additional period of time (sixty to ninety days is typical) to find a new lender. If you are at this point, the yellow light is flashing and will be turning red very quickly. You made a mistake by waiting too long; do not compound the problem by continuing to bury your head in the sand.
My experience is that institutional lenders (banks, credit unions) are much more willing to work with the borrower and extend the balloon than are individual or private lenders. The individual or private lenders are more likely to have made commitments to third parties for the balloon payment and are expecting to receive the money from you. Please have the conversation with the lender in advance of the balloon date now, and avoid an unpleasant situation later. Once the lender files suit to foreclose the mortgage, the interest rate is increased to a higher default rate, and the borrower pays for the lender’s attorney’s fees and court costs. These expenses can dramatically increase the amount you ultimately will have to pay.
With interest rates likely rising in the very near future, it may make financial sense to refinance any balloon mortgages with a current maturity of two years or less. You need to compare the interest rate on the current loan with the rate you will pay if you modify the loan at this time. Also, consider the costs of refinancing. Discuss your options with your accountant or banker, and they can do a comparison for you.
For more information about Florida real estate: click here.
For other blog posts about real estate topics: click here.