Loan modification with balloon payment

Article by Hayley Harrison, Former Branch Manager and lending officer for a community bank

Once you fall behind on your car or home loan, it’s difficult to recover. Because every missed payment brings you closer to losing your car to repossession or your home to foreclosure, it’s important to take action quickly. You may feel as if you have few options; however, most lenders do not want to seize your personal property, making them willing to help you recover. Often, lenders offer this help with loan modifications.

How It Works

During a loan modification, your lender changes your original mortgage contract to substantially lower your payment and make it more affordable for your budget. The most common way to provide you with this lower payment is to extend the term or length of your loan, though your lender can also change the interest rate.

What You Need to Do

To get started with a loan modification, you’ll need to do a few things:

· Get in contact with someone in the collections or special assets department at your lender. If someone has been calling you regularly about your payments or sending you letters, use them as a staring point.

· Be prepared to talk openly and honestly with the bank’s representative about why you’ve fallen behind. Usually, loan modifications are reserved for times when clients are in financial hardship, so now is not the time to be embarrassed about a job loss or chronic illness.

· Read over the new contract that you are given thoroughly. Make sure you understand the terms and how they will change your loan. In particular, look for whether or not a balloon payment is featured in the new terms.

· Gather the money to pay the loan modification fee or discuss whether you can have the amount added into your payments. Most financial institutions charge a flat fee for modifications to cover the cost of drafting new paperwork.

The Balloon Payment

Balloon payments can occur in any type of loan, but they are very common with modifications. A balloon payment happens when the balance that you owe on your loan does not break down into equal payments. As a result, your last payment becomes a much higher amount than your standard monthly obligation.

Notification

Your lender must disclose to you the amount of the balloon payment in your loan modification paperwork. Along with the amount will be the date upon which the balloon payment is due to the lender. Some financial institutions allow an extended grace period on balloon payments, and this information will also be listed in your modification paperwork.

Preparing for the Balloon Payment

If you’re currently having trouble paying your mortgage, the idea of making a large balloon payment at the end of your loan may seem discouraging. Fortunately, you can prepare yourself for it by following a few steps:

1. Determine how many months there are until your balloon payment is due. For instance, if your modification extended your loan for a total of 10 years, you would have 119 months until your payment (10 years x 12 months – 1 month).

2. Subtract the amount of your monthly payment from your balloon payment.

3. Take the difference calculated in Step 2 and divide by the number of months from Step 1

4. This is the amount that you need to save every month to be ready for your balloon payment. Start putting this money away in a separate account from your standard checking or savings.

With careful planning and discipline, you’ll be ready for your balloon payment and able to reap the benefits of a loan modification to save your house or car.