I have been reading on this forum for a while and I now have some questions on my own.
Please forgive me if there is some spelling or grammatical errors in this post. My native language is French.

This might be a complicated situation but I am hopeful that some of you could give me some good advice.

In 2006, my wife and I bought a condo in 4S Ranch. We put about $140K down.
We financed the rest as follow:
– We took a $145K 30-fixed mortgage with BofA at 6.125%. Monthly payment: $881
– My wife’s parents gave us a $200K loan which is a 5% interest only loan. Monthly payment: $833

The only document that was signed for this $200K loan was a promissory note (see details at the end of this post)

My wife and I divorced officially in April of 2011.

In the divorce documents, I agreed to refinance the condo by myself. The balance on the first mortgage is $130,000 and obviously I still owe $200,000 to my ex-wife parents.
A few months ago, my ex-in-laws secured a deed of trust against the condominium property.

I started an application to refinance. The problem is that the appraisal value of the condo came down to $340,000 (in other words, it lost 30% of its value in 5 years) while I was expecting it to be in the $360K-$370K range.
I was approved for a 30-year fixed loan at 4.875% for 80% of the value so I am approved for a loan of $272,000. With my income of $85,000 a year, affording the monthly payments would not be an issue.
But it means I need to bring $58K cash if I want to fully reimburse the two existing loans.
I only have about $30K in cash. The only way I could accomplish this is by using some of my 401(k), I have about $70k in my 401(k) and I don’t really want to take money from it.
On the other hand, I really don’t want to sell the condo. I love this place and I am attached to it.

A couple of weeks ago, I proposed the following to my ex-wife parents:
– I would continue to pay them their interest ($833) every month for a period of 2 years after which I would finally pay them off
– In 2 years, I am hopeful that the value of the condo will have increased a bit, which means I won’t have to bring down so much cash to refinance.
– In the event prices stay low, I should manage to save at least $25,000 in the next 2 years so I won’t have to borrow against my 401(k) to refinance.

Last Saturday, I received a letter from my ex in-laws’ lawyer, stating that they do not accept my offer and that I have until September of 2011 to reimburse the full amount ($200K) and if I fail to do so, there will proceed with foreclosing unless I put the condo for sale on the market before.
I pay them every month but they want to foreclose and put me in the street because I can’t pay them off right now.
Is it even legal for them to do so?
I wonder if anyone can tell me what my rights are. Because I am now divorced, do I have any legal obligation to pay them off now?

I would welcome any feedback or suggestion.

Thanks!

PS: I have copied below exactly what the Promissory Note and Security Agreement says:

For value received, the undersigned maker(s) promise(s) to pay XXX and XYZ, the lender(s), or order, at ***ADDRESS***, the sum of two hundred thousand ($200,000) Dollars, with Interest from May 2006 on the unpaid principal at the rate of 5% percent per annum, principal and interest.
Straight (Balloon) Note
3 Sept 2011 after date with interest payable MONTHLY and continuing until said principal has been fully paid. Should interest not be paid when due, it shall thereafter bear the like interest as principal.