Mortgage Notes with Balloon Payments: Advices for Lenders and Borrowers

Let's talk about balloon payments. Balloon payment arrangements are a routine practice in commercial real estate and more common with seller-held mortgage notes, deeds of trust and other real estate instruments but when it comes to residential properties, both the private lender and borrower may be unaware of the potential benefits and problems. One of the great things about seller financing is that you aren’t really stuck to a lending "template," so balloon payments may be a viable possibility.

A balloon payment is a final lump sum due at a loan's maturity: the remaining balance. While the loan may be amortized at a rate set for an extended period of time, the loan period actually ends sooner when the balloon payment takes care of the remaining amount due. Thus, a borrower might pay monthly based on a 20 year amortization schedule but in just five years, will be expected to pay the last chunk of the loan in full.

Balloon payments are attractive for lenders because if they're administered properly, they lead to a significant windfall just a few short years down the road. If you're considering a balloon payment on your mortgage note you must make absolutely sure that the borrower is up to the burden not just on monthly payments, but when the balloon payment itself comes due. This should involve detailed scrutiny of the borrower's profession and past financial dealings. Furthermore, remember to check applicable state and federal laws, because balloon payments may not be allowed in a particular situation. Once again, the best advice is to get a real estate lawyer.

Borrowers enjoy balloon payments if they expect their income to get a shot in the arm in the near future. If the borrower belongs to a profession with significant tiers in income, (such as medicine, law or the financial sector) is due to finish paying another loan or expects an inheritance or mature investment to come due, these are all signs of suitability. The balloon payment may be hefty, but for those with money to spend, it saves on interest in the long term.

If you'd like to boost your income before the payment comes due, we can provide another option. You can sell your balloon note. Click the link for a no-obligation quote to get started.