It is quite common for a lender how currently holds a second mortgage with a balloon to "rewrite" the loan. So that part of this I believe. What is strange is that they want to do it 2 months before the balloon. If I were you, I'd pressure them to get it over with now. They may not be too inclined to do it thinking that rates will be higher in 20 months but so what. If I were you I wouldn't want to leave this to chance.