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Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
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Extra principal payments will cover balloon loan
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Paying off a balloon loan

Dear Dr. Don,
We have an 80/20 loan. The 20 is a balloon that has a balance due after 20 years. We've had our house for about two years. Is it possible to take out a home equity loan now and pay off the 20 loan so that our money is going toward the loan and there will be no balance due at the end of the loan?

I appreciate your time,
-- Amanda Abridger

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Dear Amanda,
You mortgage financing structure is what's known as a piggyback loan. The first mortgage is an 80 percent loan-to-value so you aren't required to carry private mortgage insurance, or PMI, on the mortgage. The second mortgage finances the balance, less any down payment you made on the purchase. In your case, with an 80/20 loan, that means that you didn't have an equity stake in the home at closing.

There already is a second mortgage on the property. It just has a balloon payment after 20 years instead of having amortized payments over that time period.

Depending on what's going on in your local real estate market, you may not be able to refinance the existing second into a new, amortizing loan. I'm not sure you need to just yet.

You can work out your own repayment schedule and make additional principal payments each month on the second mortgage and accomplish the same result as you could with a refinancing. Why not try that for a while?

Use Bankrate's mortgage payment calculator to solve for what it would take to pay off the loan in the remaining 18 years, using the interest rate and the loan balance. It won't be perfect, since your current second is likely to be an adjustable-rate loan, but it'll be close enough to get started.

Bankrate.com's corrections policy -- Posted: Aug. 13, 2007
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