Reader Question: How to handle a 2nd Mortgage with Balloon Payment
I’m glad our story of getting out of debt (except for 1 mortgage remaining) has been inspirational to many of you, including the following reader:
Hi there! Very much enjoy your site. I have a question about your 2nd mortgage that you paid off early (congrats!!). We have a second mortgage that we are paying on, and it has a balloon payment due in 2020. If we pay off the mortgage early (our monthly payment is mainly just the interest), can we then start making payments on the balloon payment that is due in 2020? Is that what you did? Or did you just right one check for the balloon? Confused about this. Right now, we’re socking away as much as we can into that monthly 2nd mortgage payment so that we can tackle the scary balloon payment.
Great question! Our 2nd mortgage was about $80,000, amortized over 30 years, but with a balloon at 15 years. However, when you say “pay off”, it should mean the loan is gone. There’s a chance our mortgages have different terms in the contract, but in our case, our monthly payment included the balloon payment (hence the “amortized over 30 years). Call your mortgage company to find out what your payment goes towards, and if there’s a early payoff penalty.
If your monthly payment is mostly interest, then you’re probably just in the early stages of the loan, and it sounds like it’s a 15 year balloon payment. I would check into whether your payments are going towards the full mortgage amount or just some up-front amount. Ours was the former (the full mortgage amount). If you can put more money towards the loan, then do so, but try to do it in the same payment as your regular monthly payment. Check when the payment hits to make sure the overage was applied to the principle, not the next month’s payment or the interest.
I recommend sending extra money with the regular payment because many mortgage companies have a different address for extra payments. If you send an extra payment between mortgages, you might find the company automatically deducts interest from it as if it was a mortgage payment and then you’ll have to call and go through the hassle of getting it resolved like I did. Call and ask how your company handles extra payments and take note of the 2nd address if they use one.
If your mortgage is like ours was, then each payment you send reduces the principle, which then accelerates the amortization (if that’s the right terminology) where each subsequent payment is composed of more principle and less interest. That’s how we accelerated our payoff. The payment didn’t decrease, but the composition of principle vs interest did as we started paying off more and more.
Feel free to comment when you find out the details as I’d love to know your full situation. And thanks for reading! I hope my answer helped!
“in our case, our monthly payment included the balloon payment (hence the “amortized over 30 years).”
I think you’re misunderstanding how balloons and amortization work. If your loan was a 30-year amortization with a balloon at 15 years, that means that the monthly payments for the first 15 years are calculated as if you were paying for 30 years – in other words, like a standard 30-year mortgage. The 15-year balloon is the amount of principal still owed after 15 years – typically 60-70% of the original mortgage balance, depending on your interest rate. The balloon is whatever is left after making the regular payments. You paid your loan off early, so you never had to make a balloon payment. Regardless, if you had reached the scheduled balloon having made some extra payments but not enough to pay off the loan, the balloon amount would reflect what remained to be paid.
In answer to the original question, yes any extra mortgage payments that are applied to principal will serve to reduce the eventual balloon payment amount. The balloon is simply the remaining principal owed at the scheduled time.
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