How do I refinance my underwater second mortgage?

I try to have straight-forward solutions to the problems I bring up in my blog. Unfortunately I don’t have an easy answer for this one. I see second mortgages as the next wave of mortgage defaults that homeowners will have to worry about. Let me explain.

Many of the second mortgages that were offered to consumers were Home Equity Lines of Credit or Fixed-Rate Balloon mortgages. Both of these loans have a form of payment shock that can create an immense amount of hardship for a homeowner down the road. Many homeowners do not know the full risk associated with these two types of loans. I’ll address each one separately.

Man worried about bill

Home Equity Lines of Credit (HELOC)

Let me first state that I’m not against a home equity line of credit.  In fact, I’ve suggested them to many homeowners for various reasons. Here’s how they typically work:

  • The home equity line is a revolving account, so you can charge and pay it down as you like (similar to a credit card)
  • Unlike a credit card, these loans typically have a “Draw Period”, which is a deadline for when you can use the account as a revolving account. This draw period is usually around 10 to 15 years
  • During the draw period, the minimum payment is usually interest-only. Like a credit card, you have the option of paying it down anytime you like, which will reduce the payment for the following bill cycle.
  • The rate is usually an adjustable rate using a fixed margin and the US Prime Rate as the index.  Add these two figures together to determine your rate (Here’s a link to the current US Prime Rate-
  • When the “Draw Period” has ended, the loan will convert into an amortized loan with principal and interest payments. The rate calculation will stay the same, but the homeowner must now pay principal. The amortization schedules are typically structured for a fixed period of 10 to 25 years after the draw period. The higher the balance at the moment the loan amortizes, the higher the payment will increase will be.
  • Some lines of credit have a locked-rate feature where you can convert all or a portion of your balance to a fixed-rate loan. Keep in mind that the fixed rate you’ll be offered will likely be higher than the current adjustable rate that the loan is at. In addition, the locked terms are usually a 15-year fixed term, which will increase the payment.

Many homeowners do not know that their draw period is coming to an end. Since most draw periods are 10 years or longer, most home equity lines are not amortizing yet. However, many of these homeowners have not paid down their home equity line and the time before their amortization schedule to begin is rapidly approaching.

Here’s an example of how payment shock can impact the homeowner:

Let’s suppose that a homeowner has a typical HELOC. The loan has a rate of prime + 1%, which currently amounts to 4.25%. The balance on the line of credit is $100,000. The loan allows the homeowner to use the draw feature for 10 years and must pay back the balance in 15 years after the draw period is over. Let’s suppose the homeowner opened this loan in 2005.

Now that we’re in 2012, the homeowner has used 7 years of the draw period, but unfortunately hasn’t paid down the balance. They now only have 3 years left to pay down the balance before it amortizes.  Unfortunately, this isn’t done and the homeowner sees a large payment shock. Assuming the prime rate is still at 3.25% in 2015, this is the change in payment:

Prior to amortization-

4.25% @ $100,000 = $354.17 interest-only

After amortization-

4.25% @ $100,000 = $ 752.28 principal and interest

This payment increase is more than double. What’s worst is that the loan is still adjustable, which means the payment can go up further if the prime rate increases. If the prime rate returns to the same rates prior to the recession (8.25%), the homeowner’s payment goes up to $976.38!  That’s more than 2.5 times the payment it was prior to the amortization period.

You’ve got my attention.  How do I protect myself?

The only sure-fire way to protect yourself is to do everything you can to pay down the HELOC balance during the draw period. You won’t see a substantial difference in payment now, but the difference will come when you’re making an amortized payment. If you’re discouraged by the balance of your HELOC, don’t be. Most homeowners do not have the ability to pay off the HELOC completely before the draw period ends. The key is to pay down the balance as much as possible so the payment shock is reduced.

If this homeowner realizes this and makes an additional $1,000 towards the principal per month and pays the balance to $64,000 before the amortization, the payment shock reduces from $752.28 to $481.46.  Even if the prime rate increases back to 8.25%, the payment is more than $300 less going from $976.38 (not paid down) to $624.11 (paid down to $64,000).

One other note, if you’ve taken the time to refinance your first mortgage, I recommend using your payment savings towards paying down the HELOC.


Fixed-Rate Balloons

These loans scare me even more than HELOC’s. They have the largest payment shock and many, if not most homeowners think it’s a normal fixed rate mortgage.

The way these loans work is they are paid like a regular fixed rate loan. However, the final payment is due sooner than the term is calculated for. This means that after the second-to-last payment is done, the remaining balance is due as a lump sum.  The most common balloon loans are 30-year due in 15-year loans. This means you pay it like a regular 30-year fixed payment, but after 15 years, the remaining balance is due in full.

When I ask most homeowners about their second mortgage, they often will say, “Oh no, my loan isn’t a bad loan. It’s a fixed rate loan.”  It’s true – “fixed-rate balloons” technically ARE fixed rate loans. The rate never changes. However, that doesn’t change the fact that a huge lump sum is due at the end of the term.  This is a function of the loan term, not the rate. Most people think the only toxic mortgages are adjustable rate loans.

Here’s an example of how a balloon payment can impact the homeowner:

Let’s suppose a homeowner has a fixed-rate 30 due in 15 second mortgage. Similar to the other scenario for the HELOC, the loan is for $100,000  at 7.5% and was originated in 2005.

Now, the risk of this loan doesn’t come as soon as the HELOC. The above HELOC scenario had a payment shock in as little as 3 years.  The fixed-rate balloon continues with the same payment for another 8 years before things change.

Note: fixed rate balloons were more common in the mid-2000’s than regular fixed rate mortgages without a balloon feature for loans with a 30-year term. This means if you have a 30 year fixed-rate second mortgage from the mid-2000’s, chances are your loan has a balloon payment coming due before long.

Let’s see how the final payment works out:

$100,000 on a 7.5% 30 due in 15 year balloon loan = $699.21 per month for the first 179 payments

The final payment due (remaining balance)= $75,654.62

The final payment is not a typo. The bank really expects you to come up with a single payment equal to over 75% of the original loan balance on a single payment. If you don’t have the cash or the equity to refinance this loan, you’ll be facing a default.


You’ve got my attention.  How do I protect myself?

Unlike a HELOC, a partial pay down will not do much to fix this problem. You truly have to commit to paying down the balance completely before the final payment is due. If you’re lucky, you’ll get this done or you’ll get the balance low enough that you can roll the balance to an unsecured loan, even a credit card cash advance. You also may be able to take a cash-out auto loan on a paid vehicle to pay off the balance, or a 401k loan against your retirement. In most cases, I do not recommend cash advancing a credit card or putting a loan on a paid vehicle or retirement fund, but you may have no choice. The only glimmer of hope is that most balloon loans have a due date of 15 years, meaning you may have more time to finish paying off the loan.


How do I find out the terms of my loan?

For many of you, you may feel duped learning your loan may have an amortized or balloon payment you weren’t expecting. Yes, of course we should read the documents we sign, but many miss these details. Lenders often do not explain the terms well enough. Hopefully you still have your original loan terms available to review. You can learn about the most important details of your loan on a document called your “Note.” If you cannot find it, call your lender and ask when your HELOC draw period ends and what the term is after the draw period. If you have a fixed-rate second mortgage, ask if your loan has a balloon payment and if so, when the payment balloons.


I hope more homeowners with second mortgages find this post soon enough to work toward paying down their balances. Neither of these loans will pose a huge risk if the homeowner discovers how these loans work early enough. The problem is most homeowners do not know the payment shock is coming.

26 comments to How do I refinance my underwater second mortgage?
  • Very good info. Lucky mee I ran across your site by accidet (stumbleupon).
    I’ve book-marked it for later!

    Also visit my blog post; investing in gold
    and silver (Jorge)

  • It may seem wrong or shady to you that they do not offer you full price for
    your gold, but that is only because they have to make money as
    well. Ask around to find one who will be able to create your vision
    for you. Pink and purple garnets fall under the rhodolite variety.

  • That very persistent voice will not shut up until you give in and feed it.
    Walking on a regular basis will cause your brain to secret pleasure inducing chemicals.
    Exercising at extraordinary times of this day has the particular advantages.

    Here is my page: quickest way to lose weight (David)

  • You need to surround yourself with like-minded, positive, happy people – who’ll support you in your dreams and goals.
    In his book, The Secret behind the Secret, he says
    that it can be difficult but not impossible to present your desires to the world.
    ” It is all life, and it is all a part of your growth.

    My web site ask and it is given

  • Human life is full of changing phases and one need to accept everything that flows in a way.

    But if you are a good friend with a lender, there is a strong possibility of securing quite a favorable rate.

    Private hard money lenders aren’t managed by the Federal or state Authorities so they enjoy much more
    versatility and can fund loans much faster than banks can.

  • To learn more about how the law of attraction and money
    work together, read on. You start looking for a new car, something special,
    something not like anyone else’s, something unusual.
    It’s an ego trip to think you have selected the right person for
    you, when you don’t know everyone in the pool.

    Take a look at my web-site … abundance with law of attraction

  • Attractive section of content. I simply stumbled upon your website
    and in accession capital to claim that I acquire in fact loved accounnt your blog posts.
    Any way I will be subscribing to your augment or evern I achievement
    you get admission to constantly rapidly.

  • Everything is very open with a clear explanation of the challenges.
    It was definitely informative. Your site is very helpful. Many
    thanks for sharing!

  • Some like to show the price of the jewelry on individual
    pieces. Do you want it to look brand new for an upcoming rendezvous.
    A proud example of the aforementioned changes in social open-mindedness
    regarding jewelry is the growing prevalence of stretched ears.

    my web page … online jewelry shoppe

  • Banks will grant loans if the person applying for the said loan has
    some vested financial interest in the business. Savings Path
    ensures that they submit your application to
    a lot of sub-prime lenders. The renovations could even potentially add value to your home.

    Review my web-site best home loans for bad credit, Bruce,

  • I’m very happy to discover this great site. I want to to thank you for ones
    time for this fantastic read!! I definitely liked every bit of it and I have you saved as a favorite to check out new information in your website.

  • Hey there! I know this is sort of off-topic however I needed to ask.
    Does building a well-established website like yours require
    a lot of work? I am completely new to operating
    a blog but I do write in my journal everyday. I’d like to start a blog so
    I can easily share my personal experience
    and feelings online. Please let me know if you have
    any suggestions or tips for new aspiring blog owners.


  • All exchanges during the crash will be rolled back, meaning it is like
    they never happened, and the Bitcoin will magically
    be worth $17. This is a valid premise, because this system is, after all,
    a system of gambling, and people are attracted to easy
    ways to win money while gambling, and in a keystroke lottery a single consensus-validated keystroke makes you eligible to win the
    pot. Make sure you download and install the dependencies before you install the freeware.
    arrest on a young Bitcoin website owner, exposing a deep
    web of drugs, guns, prostitution, murder for hire and a
    ready tool for tax evasion and money laundering.

  • This is all for achieving web supremacy: high rankings in the
    optimization of your website without having to pay focus on the
    content so we could get more views. Therefore, search
    engine optimization, then abc it would not be a strong
    enough indicator if you could afford a company or not.

    Again, this prevents you from having to pay tens
    of thousands of dollars, increase your client base.

  • Thanks in support of sharing such a good opinion, post is fastidious, thats why i have read it completely

  • They could either be a gated grounds or a high-rise apartment building.
    Does your mother keep regular appointments to have her hair done.

    The authorized figures disclose that large segments of the old people in India are uneducated, out of
    workforce, partly or entirely dependent on others and suffering from health troubles or bodily disabilities.

    Here is my blog Miami Home Health care

  • It’s an awesome piece of writing in support of all the web
    people; they will take advantage from it I am sure.

  • I’m noot sure exactly why but this weblog is loading incredibly slow
    for me. Is anyone else having this issue or is it a issue on my end?
    I’ll check back later on and ssee if the problem still exists.

    Take a look at my site … skin care doctors burnsville

  • Now I am going away to do my breakfast, later than having my breakfast
    coming over again to read more news.

  • I enjoy, cause I discovered exactly what I used to be
    having a look for. You’ve ended my four day long hunt!
    God Bless you man. Have a nice day. Bye

    My web site:

  • Yes! Finally someone writes about good email.

    Visit my web blog :: Internet Marketing [Instagram.Com]

  • I see you share interesting content here, you can earn some additional cash, your
    website has huge potential, for the monetizing method, just search in google –
    K2 advices how to monetize a website

  • In the Greatest Story Ever Told the Colorado
    River became the Nile. They set out to capture the visceral tension of having real people within action sets and the primal aesthetic of roaring engines, screeching tires and crashing metal.
    Its initial price point was set too high
    and consumers balked.

  • There are also candies in cages, along with
    multiple chocolates just itching to take over your board.
    Don’t fool yourself into thinking that this is a trivial task as
    it is not as simple as it sounds. Congress urges Redskins owner to change name; 79% of Americans don’t

  • However in case you based it on popularity, undoubtedly you’ll have
    y8. If them will certainly break regulations and present away
    free games, who claims they may stop using hack your individual computer.
    This adds an interesting aspect towards the game because as you go
    via your quest you will come across other player individual preference will be able to interact with.
    Can I watch my recorded movies on any home or car DVD player.

    Wouldn’t it be great to win free money doing offers. Furthermore, it
    is preferable that the novice poker online player should stay in the
    lower limits until he actually builds his experience.
    It provides users with precise and reliable information around the best free
    bingo sites to choose. Buying a Xbox bundle placed in general is a
    lot more affordable, and may give you the most bang for your buck.
    3 Month Xbox LIVE Gold Membership: Included with your console is a free
    3 month subscription to Xbox LIVE Gold , the top in gaming
    and entertainment. The ball is often refered to as the “pigskin” because in the early days
    of football, balls were made of inflated
    pig bladder placed in a very leather cover. Article Source: dress up games you come back towards the old days with the happy
    ending of stories as should you were living in a realm of legend
    which has a pretty princess plus a powerful king.
    com which provides free games in categories including strategy, voyage,
    rpg, strategy, puzzles simply to name a few.
    We constantly receive a high number of users that need to register again as their membership has
    expired. Different applications may require one to put the games in a very
    special folder. Hence, you should devote 100%
    attention to choosing the real solution with the problem.

    The idea behind Gamesoid is always to have a very little bit of lighthearted fun and luxuriate in yourself during
    your time and effort off. No requirement of any
    extravagant film card or maybe more processor. The video games
    might be downloaded on for the computer from all of these websites or from other
    sharewares totally free. The game has some very disturbing scenes and creepy
    sounds, so make sure you let down the lights and out on your
    headphones to witness sharp surprise ending. Older people say they
    play games as it alleviates loneliness and puts them
    talking to others. Flag Football – Flag Football is often a variation of tackle or contact football where players
    must snatch a “flag” in the uniform of your opposing player as
    opposed to tackling. 99 from Amazon, Best Buy, Game – Stop
    and also other retailers. No longer can you compete being a top
    rank, you could simply play as hard if you may and
    acquire the rare armor, like everyone else.
    In many social network sites such as facebook,
    ibibo, there is certainly option to play free games. This does however mean how the
    Internet, however, not in its infancy, is not yet fully developed.

  • Hello, the whole thing iis going well here and ofcourse every one is sharing data, that’s truly excellent,
    keep up writing.

    my webpage fif 15 ultimate team coins [Alessandra]

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>