February 27, 2019
What is a “Balloon Payment” and When Does it Apply?
Occasionally in residential transactions that we deal with—and more commonly in commercial property transactions—our clients encounter and/or secure balloon loans. These are a kind of loan in which a borrower is required by the lender to make monthly payments as usual, but in which a very little bit of the principal of the loan (or none at all) is amortized into the monthly payments, resulting in lower payments comprising mainly interest for a set term. This term is usually short—generally three to seven years or so. Once the term is complete, the “balloon payment”—or the remainder of the principal—comes due in a single lump sum.
This amount tends to be at least twice what the monthly payment has been—and can range into the hundreds of thousands of dollars. This is part of why we see them more often in commercial lending—where the property in question will have been used as a center of wealth-creation beyond its equity or real value—than in consumer lending.
Technically speaking, balloon payments are part of what are called “two-step mortgages.” Often once the term described above expires, the balloon payment will be rolled again into a new mortgage or one that continues to amortize it, but at the rates in currency at the time of the term’s expiry. This is considered a “re-set,” and when it is accomplished the balloon payment becomes something altogether less onerous.
When balloon loans are considered by borrowers for their home real estate needs, it is often justified by the consideration that, before the balloon payment comes due, the borrowers may refinance the loans or sell the homes. For some this may indeed turn out to be a good option. But it does involve the onboarding of a certain amount of risk—that the housing market will dry up in the meantime, or that the borrower’s credit score may sink into the gutter for any number of reasons, which may result in the home’s being unsaleable or make refinancing inactionable. Then the balloon payment would come due nonetheless—and foreclosure (and even worse credit) would be on the immediate horizon.
Whether you’re shopping around for property in Florida, Rhode Island, or Massachusetts, contact us to see how we can help. Here at Topouzis & Associates, P.C. we offer title curative services, and our title insurance offerings are backed by multiple underwriters. We are staffed by residential real estate specialists and stand ready to help you avoid costly delays and streamline your residential transactions—preferably without any balloon payments floating overhead.