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How to Reset Balloon Mortgages

by Jayne Thompson

The real estate profession does like its metaphors, and it hit the nail on the head with the term "balloon mortgage" to describe a mortgage whose monthly payments do not meet the principal of the loan over the note period, typically five years to seven years, leaving the borrower to settle a significantly higher sum at loan maturity than the payments which came before it. In other words it blows up, like a balloon. Not surprisingly, some borrowers struggle to pay the lump balancing amount. If that's you, reset your mortgage. Resetting extends the term of your mortgage at the current market interest rate.

Review your promissory note. Find out if you can reset by reading the information in the Balloon Note Addendum and Balloon Rider, commonly referred to as the Reset Rider. Some Reset Riders provide for an automatic reset. If yours is one of them, all you have to do to convert your loan is meet the preconditions. However, it is more likely that you will have to make a formal application to reset.

Contact your lender. Ask it to explain the procedure for resetting. Have the lender send the forms you need to complete, clarify the time limit for submitting the paperwork and confirm any conditions you have to satisfy before you can exercise the reset option.

Satisfy your reset preconditions. Both Freddie Mac and Fanny Mae list these conditions: that you own and occupy the property; are up to date with your payments; have been no more than 30 days late on any of the 12 previous monthly payments; and that your property is free of all liens and encumbrances against the title, save for property taxes. A further reset condition, that your modified interest rate (the "reset note rate") is not more than 5 percent above your Balloon Note rate, effectively means that the market also plays a part in whether you can reset.

Pay attention to Reset Notices sent by your bank. Some servicers will send you a formal notice specifying your Balloon Maturity Date, the estimated amount of balloon balancing payment due on that date, and the procedure to follow to reset. Read the notice carefully.

Respond to the Reset Notice in the required manner. Servicers that issue Reset Notices usually send pre-printed response forms for you to complete and return within the required time period, typically no earlier than 60 days and no later than 45 days before before the Balloon Maturity Date.

Apply in writing for your mortgage to be reset, if your loan servicer does not follow the Reset Notice procedure. There is a time limit for making your application, typically no later than 45 days before the Balloon Maturity Date.

Sign any documents necessary to perfect the reset. Depending on your bank, this might involve signing an entirely new fixed-rate note, a refinancing instrument or an agreement modifying your existing loan.

Tip

  • Failing to meet all the reset conditions does not automatically mean that you cannot reset. Contact your lender to discuss your options.

Warning

  • The reset procedure is not automatic. If you fail to respond to a required notice, or fail to apply on time, you will lose your right to reset.

Photo Credits

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