Method to Pay Off a Balloon Home Equity Loan Early

Balloon mortgages are designed to give borrowers a period of time--often as much as 10 or 15 years--in which they only need to pay portions of their interest on the mortgage. Some consumers get into trouble when the balloon comes due. You can begin to pay the balloon early by making additional principal payments against the loan. The best way to do this is to review your monthly budget, cut some expenses (entertainment expenses are usually the most nonessential bills) and use the extra cash to pay down the principal balance each month. For a more regimented schedule, you can use an amortization calculator to determine how much you'll need to pay extra to have the loan paid off before the balloon maturity date (see Resources for an amortization calculator).

Principal Payments

Balloon mortgages are designed to give borrowers a period of time--often as much as 10 or 15 years--in which they only need to pay portions of their interest on the mortgage. Some consumers get into trouble when the balloon comes due. You can begin to pay the balloon early by making additional principal payments against the loan. The best way to do this is to review your monthly budget, cut some expenses (entertainment expenses are usually the most nonessential bills) and use the extra cash to pay down the principal balance each month. For a more regimented schedule, you can use an amortization calculator to determine how much you'll need to pay extra to have the loan paid off before the balloon maturity date (see Resources for an amortization calculator).

Second Mortgage Refinance

Balloon mortgages are considered short-term, temporary solutions for homeowners. They are primarily used for real-estate investors who only plan to hold properties for short periods of time. Refinancing a balloon mortgage into a traditional second mortgage will ensure that the payments, interest rate and term do not change. When refinancing a balloon mortgage, the payments will go up. Because the payments will now be calculated on the full principal and interest due, the monthly payment will be higher than the balloon payment.

First Mortgage Refinance

Some consumers prefer to put all their secured debts into one mortgage. A full first mortgage refinance can provide the benefit of lower overall monthly payments and a lower overall interest rate. However, origination points charged on a first mortgage are often calculated on a percentage of the total loan amount. These can add up quickly. Customers considering paying their balloon mortgage with a refinance should consider the costs of paying extra (see Principal Payments) as opposed to the costs (closing fees, origination charges) of a first mortgage refinance. Both will get you out of a balloon mortgage, but you must choose the option that saves you the most money.