What is a Balloon payment?

5 Replies

I'm new to RE investing and have found an interest in Performing and non-performing notes and am currently trying to absorb as much as possible on the subject. I have been reading a lot of forum posts and listened to a few podcasts on Note investing and am getting a better grasp on how it works but i keep coming across the term "balloon Payment". Can anyone explain what that is / how it works / and why it's beneficial. 

The help on this blog is wonderful and i recommend podcast #28 to anyone trying to learn about investing in Notes!

@Zachary S.

A balloon payment is an oversized payment which is generally posited at the end of the loan term.  It's used frequently in commercial and sometimes on owner finance loans to force a payoff and/or refinance.  For example, the lender may define the loan term as 10 years but setup payments on a 30 year amortization.  In this example, regular payments are based on the 30 year amortization but the final payment is the total unpaid balance at that point. 

Originally posted by @Zachary S. :

I'm new to RE investing and have found an interest in Performing and non-performing notes and am currently trying to absorb as much as possible on the subject. I have been reading a lot of forum posts and listened to a few podcasts on Note investing and am getting a better grasp on how it works but i keep coming across the term "balloon Payment". Can anyone explain what that is / how it works / and why it's beneficial. 

In most circumstances a balloon payment would be a final payment paying off the note before the monthly payments would pay it off. 

The benefit to you as an investor would be a higher return than a fully amortized note.

Example if you were to purchase a note I created on selling a house.  You would most likely purchase it at a discount (Less than the outstanding balance) So you are earning the interest rate of the note plus earning the discount also as the borrower pays back the face value of the note plus interest.

For example:

Loan amount $186,000

payments $2,100/month on a 10 year Amortization.

Balloon payment due in 36 months.

That means that in 36 months you have to redo the loan(continue at same payment rate with a possible interest rate adjustment) for the remaining principal or pay it off(the remaining principal)

This gives the bank an out at scheduled intervals. Plus it gives you time to make payments and then either sell the property or extend the loan.

Yuck to all of that.

A Balloon payment is any payment due at maturity which is over the amount of the periodic scheduled payment.  Any balloon payment which is double the periodic scheduled payment requires disclosure.

If investing in loans, balloons are not always a benefit.


 

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