Question: How to prepare for an approaching mortgage balloon payment?

People walk past a mortgage advertising stand.

In about 2.5-3 years my husband and I have a balloon payment due on a second mortgage. The mortgage amount is 42,000 that we will need to pay back. After the addition of twins to our family in dec. 2011 I became a stay at home mom and while we are mostly breaking even we aren't making a dent in that balloon and have no idea at this point how we are going to pay it back. Our house value is underwater and all attempts so far at refinancing have not resulted in anything. The solution seems to be to take a loan from our 401K but I am sure that there are all sorts of things that I am not realizing or thinking of since the number one rule of retirement finance seems to be "don't touch the 401K". My husband currently makes 100K a year at a stable job. That will never increase but he gets variable bonuses twice a year equaling about an additional 30K. He is 31 and has 190K in his 401K. I have about 90K in retirement savings between a roth IRA and my 401K that I rolled over after leaving work. In a few years I may go back to work but right now that is up in the air. We are just worried that when the balloon payment hits our only option at that point will be to borrow from the 401K and were wondering whether doing it now versus then made more sense. We would certainly save a lot of interest in the mean time on the mortgage.

We have several other debts as well that we are working on including car payments, student loans, and an IVF loan. In a few years our financial situation will be greatly improved with paying some of these off but we will still have the second mortgage to contend with.

Any thoughts would be appreciated,
Thanks, Gin Braband

Response:

Your answer, Mother of Twins, is in your question!  You say the balloon payment is due in two and a half to three years and your husband gets two annual bonuses equaling another $30,000 or so each year.

Those bonuses will have to be saved completely each and every time for the next two and a half to three years (taking into account that taxes will reduce the full amount you can save).  Can you do that?  What do you usually use the bonuses for?  

In the meantime, also go to your lender on that balloon and see if you can instead get it rolled into another more stable product like a home equity line of credit (variable rate but no balloons).  

As for a 401k loan, the big risk here is not only the loss of the funds being invested in the market and hopefully growing, but that should he be laid off the loan will have to be paid back usually anywhere between 30 to 60 days (depending on the plan).  And guess how much it will cost to borrow money without a job?  A LOT--we're talking interest rates in the high 20's.  

If you want to stay in the home and avoid a short sale and move (which would be an Olympian feat with young twins) save, save, save those bonuses and anywhere else you can.  Thankfully, you've got time! 

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