Balloon Payment Info

A balloon payment occurs when a loan is not fully amortized with the principal balance due, and is payable in full at some point in the near future.

Generally they have an early payoff, resulting in the loan balance required to be paid in full.

Interest-only loans usually contain a balloon payment provision.

These are usually found in mortgages but may be found in some auto and personal loans as well.

• Usually the initial down payment required is less than it would be under a standard mortgage or loan.
• Most importantly this type of loan most commonly has a lower fixed interest rate throughout the shorter life of the loan.
• They are a great idea for people with good real estate investment knowledge. Especially if this investor has the knowledge and the ability to wisely manage their spending.
• Free up capital to pay down other higher interest rates loans.
• Provides a savvy real estate investor the opportunity to use that capital to save money to invest elsewhere increasing their returns.
• These loans make a lot of sense for individuals expecting a financial windfall at some point in the future. For example due to the sale of another real estate investment, a large tax refund, an inheritance, or an expected dividend payments.

For whatever your reason, if your current cash-flow holding is not an indication of you future cash holdings, this type of loan may be an intelligent choice for a savvy real estate investor.

When I buy real estate that I plan to sell quickly or hold for a short period of time I prefer a balloon payment loan.

Here's why:

* Lower down payment to buy the investment property, my monthly payments are lower because most of the time they are interest only loans and my loans usually don’t have an early prepayment penalty.

A lender making you a balloon payment loan will want some assurance from you that the balloon payment will appear from the sale of the property or by refinancing the loan.

* Although some lenders are more free with granting, it is very important for you to understand if a large sum of money is not expected to appear before your balloon payment is due, that you pay careful attention to setting aside a minimum amount each month to guarantee you will have the money or that you have secured other funds when the payment comes due.

For this reason unless you are a savvy real estate investor I would not recommend these loans to a first time home buyer.

A borrower must make sure he or she will have the funds for payment at the end of the term or they can end up in foreclosure.

Given the short to medium term nature of most of these loans, it can be a big problem for most unsophisticated borrowers. They realize the payment becomes due and they are struggling to get a new loan.

Many lenders will allow the borrower to convert their initial loan into a more traditional mortgage structure on or near the due date of the loan.

This may help prevent you from losing your home so you as the borrower should make sure this is an option before taking out the loan.

You will have to maintain good credit, your income will have to be the same if not more and you will have to meet all the lenders loan requirements to refinance the outstanding mortgage balance.

As I’ve already mentioned balloon payments can be very attractive because of the extremely low monthly payments however they are often viewed as being too risky for most first-time borrowers because of the high probability they will not be able to make the payment at the end of the term.

A borrower may want to look into other options if they are not absolutely certain they can handle the dangers of an impending large payment.

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