Real Estate Word of the Day: Balloon Payment
A balloon payment is a large, lump-sum payment scheduled at the end of a loan term. It is significantly larger than the regular monthly payments made during the life of the loan. Balloon payments are common in both commercial and residential real estate financing, and they are typically associated with short-term loan agreements, often ranging from 5 to 7 years, though the term length can vary.
In a loan with a balloon payment, the borrower makes relatively small, consistent monthly payments for a set period. These payments typically cover only interest or a portion of the principal and interest. At the end of the loan term, the borrower is required to pay off the remaining balance in one substantial lump sum—the balloon payment.
Benefits
Balloon payment loans often have lower monthly payments compared to traditional fully-amortized loans. This can be attractive for investors looking to maximize cash flow in the early stages of property ownership. Borrowers may use the lower initial payments to invest in other areas, improve the property, or grow their business. The assumption is that by the time the balloon payment is due, the borrower will have the means to refinance, sell the property, or use increased cash flow to pay off the balance.
Risks
When the balloon payment comes due, the borrower may need to refinance the remaining balance. If market conditions have changed, interest rates have risen, or the borrower's financial situation has worsened, securing new financing could be challenging or expensive. If refinancing isn’t an option, the borrower might need to sell the property to meet the balloon payment. This could be problematic if the property value has decreased or if the market is unfavorable for sellers. Failure to make the balloon payment can result in default, which may lead to foreclosure or other legal actions by the lender.
Looking to buy or sell your home on Staten Island? For all your real estate needs, look no further than Tom Crimmins Realty! Give us a call at (718) 370-3200, and we can provide you with professionally-trained agents who are flexible to all that you’re looking for!
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