A balloon payment is a one-time, large payment due at the time of the maturity of a loan.
A balloon payment, in simple terms, is a principal amount that is not paid monthly and hence the final payment is due at the end of the loan.
Now you might ask why would anyone want a balloon mortgage and have a large chunk of money due all at once?
First and foremost, balloon payments are typically used in commercial loans and more specifically in commercial mortgages.
This type of loan structure is really useful for those who invest in a property to either sell it before the loan matures or refinance it.
Some of the typical businesses that utilize this type of payment are fix and flip investors and landlords.
Fix and flip real estate investors purchase, rehab, resell the property, and repay the loan. Landlords purchase, rehab, and then refinance short duration loans.
A balloon payment can start with fixed payments for a specific duration, and the remaining balance is paid at the end of the term.
This allows borrowers to make lower monthly payments as opposed to making higher payments upfront.
Borrowers can use the money to invest in the business, generate more profit, sell the property, and then pay off the final amount at the end.
These types of payments are most suitable for short term funding that brings in the capital and increases the cash flow with the purpose of generating a larger amount of profit.
Always evaluate your options, do some basic calculations on what your appetite is. Also make sure you have an exit strategy in case something were to go wrong.
HARD MONEY LENDER
Expert contributor at RealEstateWords.com
Interested in becoming a contributor? Apply for our Expert Contributor Program.