Balloon payment

Balloon payment: Amount paid at the end of a loan to cover the remaining balance.

Balloon payment: A large payment due at the end of a balloon mortgage loan. A balloon payment is usually attached to a short-term mortgage loan when only a portion of the loan’s principal balance is amortized over the term. At the end of the term, the outstanding balance is due as a final payment.

Weighing the Pros and Cons of a Balloon Payment

A balloon payment can be applied to either a fixed as well an adjustable-rate interest rate. Balloon payments reduce monthly payment by not amortizing the entire loan and are often ideal for companies or homeowners who might be short on cash in the short term, but expect their liquidity to improve in the future.

Often, homeowners are encouraged into balloon payment mortgages by banks that use the lure of affordable monthly payments as a bait. What many homeowners don’t expect though is to be met with a substantial financial payment in a relatively short time.

Experts advise future homeowners to weight their options. Though banks always offer the initial possibility of refinancing down the road, this option is not always available to homeowners under financial duress.

“If the buyer is unable to refinance, the seller may want to consider a modification and longer extension rather than starting foreclosure for nonpayment of the balloon mortgage,” says Tracy Well from Note Investor.

“One solution is for the seller to modify the note with monthly payments based on a 25 or 30-year amortization and keep, but extend, the balloon payment to 7-10 years from the date of modification,” she adds. “They could agree to let the note fully amortize and eliminate the balloon payment altogether. However, this could limit the seller’s options in the long run.

“By extending the balloon, the seller is not obligated to keep receiving payments for another 25-30 years. The extension provides the buyer both time and motivation to get their financial affairs in order to qualify for refinancing.”

Balloon payment

Balloon payment: Amount paid at the end of a loan to cover the remaining balance.

Balloon payment: A large payment due at the end of a balloon mortgage loan. A balloon payment is usually attached to a short-term mortgage loan when only a portion of the loan’s principal balance is amortized over the term. At the end of the term, the outstanding balance is due as a final payment.

Weighing the Pros and Cons of a Balloon Payment

A balloon payment can be applied to either a fixed as well an adjustable-rate interest rate. Balloon payments reduce monthly payment by not amortizing the entire loan and are often ideal for companies or homeowners who might be short on cash in the short term, but expect their liquidity to improve in the future.

Often, homeowners are encouraged into balloon payment mortgages by banks that use the lure of affordable monthly payments as a bait. What many homeowners don’t expect though is to be met with a substantial financial payment in a relatively short time.

Experts advise future homeowners to weight their options. Though banks always offer the initial possibility of refinancing down the road, this option is not always available to homeowners under financial duress.

“If the buyer is unable to refinance, the seller may want to consider a modification and longer extension rather than starting foreclosure for nonpayment of the balloon mortgage,” says Tracy Well from Note Investor.

“One solution is for the seller to modify the note with monthly payments based on a 25 or 30-year amortization and keep, but extend, the balloon payment to 7-10 years from the date of modification,” she adds. “They could agree to let the note fully amortize and eliminate the balloon payment altogether. However, this could limit the seller’s options in the long run.

“By extending the balloon, the seller is not obligated to keep receiving payments for another 25-30 years. The extension provides the buyer both time and motivation to get their financial affairs in order to qualify for refinancing.”

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