seller financing with balloon payment. help!

[Paul Kit]

please bear with my stupid question. I am learning.

Seller offer seller financing with 15-20 years amortization and 10 years balloon. Is it better than a fixed 15-20 years term?

What should I concern?

[Tom Shallcross]

Hi @Paul Kit, a 20yr amortization with a 10 year balloon will have payments equal to a 20yr loan but the loan will come due in it's entirety after 10years.   For example, if you have a 100k loan on a 20 year amortization with a 10yr balloon at a 5% rate, your monthly principal/interest payments would be $660.  After making this payment for 10 years you would still owe roughly 61k which would come due on your 121st payment (1st payment after ten years) 

It's much better to have the straight 15-20 year term as you won't have to worry about the balloon coming due.  

However, if your only option is a 20yr amortization with a 10yr balloon, you can still make this work.  You just have to have an exit strategy to refi out of this financing situation within 10yrs.   Some folks refinance out of this (make sure you don't have a prepayment penalty on the seller financing) while others treat the loan like a ten year loan.  Going back to my 100k example, instead of making payments of 660, make payments of 1060 and the loan is paid off in 10 years.  This sounds great in theory but probably destroys your cashflow.

FWIW I would highly suggest avoiding balloon payments, especially the newer you are to this.