What is a balloon? Note?

Question

What is a "balloon" payment (financing) that alot of you talk about?

Also-what is a note?  I read a post about a seller wanting to sell using owner financing and then selling the note to another investor.  I have no idea what this means.

Help out a newbie...Thanks!

Account Closed · Answer

the note is the loan...if you're owner financing a property, you can sell the loan (note) to someone else, and they can assume your position, much like banks selling loans on the secondary market.  for instance, i somehow have a mortgage with chase even though there's no chase bank within 200 miles of me in any direction!  my original bank sold the loan to them.

a balloon is when the loan is due in full, even if it hasn't fully amortized.  say you have a long amortization schedule of 30 years--that will keep your payment low, but a balloon in 5 years means you have to sell, refinance, or come up with the rest of the money somehow at that point to pay off the loan

JON BEAT ME BY A HAIR!

Steve Babiak · Answer

You could refinance to re-pay the first lender; you might have to be alert for any pre-payment penalties.

Angelo Russo · Answer

HELOC is just a second mortgage, but if you are refinancing the first out, you can get traditional financing if you want, or a HELOC.  be careful of prepayment penalties and depending on the timeline, the appraised value might be limited to what you paid, not true value.  (over 1 year is almost never an issue)

Travis Bill · Answer

Is it possible to do a 5 year balloon and after you own the property for a year take a HELOC to pay back the first seller? Is that viable or are there rules against that?

Thanks.

Jon Holdman · Answer

A "balloon" is a larger payment than the usual payment.  Say a lender want's to get paid off in five years.  The payment on a five year, $100K, 5% loan would be $1,887.12.  A 30 year loan would be $536.82.  The borrower and lender might agree to use 30 years for the amortization period, but have a balloon payment after five years.  That was the borrower gets the lower payment and the lender get the money back in five years.

A "note" refers to the promissory note that's part of any loan agreement.  "Selling a note" refers to making a loan and then selling the rights to collect the payments to someone else.

This happens all the time for conventional mortgages.  Some bank originates the loan.  They turn around very quickly and sell the loan to Fannie Mae or Freddie Mac.  The back gets their money back and can do another loan.  FM or FM gets to collect the payments.

What is a balloon? Note?

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