Be Very Careful With Balloon Payment Loans (2024)

Let’s say it’s time to buy a new home or property, and you take out a mortgage on that property. The mortgage payments look very affordable—much less than what you would think they would be for a loan of the size that you are taking out. But what you don’t realize is that at the end of that loan lies what can be considered a poison pill—a balloon payment.

What Is a Balloon Payment?

A balloon payment is a one time, often very large payment that is due at the end of the life of your loan. Most traditional residential home loans don’t have balloon payments, but some commercial and construction loans do, and some non-traditional residential loans, often from private lenders, could have balloon payments.

Instead of dividing what you owe evenly over your number of payments, a balloon payment loan lets you pay much less every month, and then defers a large amount of the loan balance or principal in one, giant, balloon payment, usually at the end of the loan term.

Loan terms for balloon payment loans tend to be a little shorter. Whereas a traditional home loan will be about 30 years, a balloon loan may be as little as 5 or 10 years.

The Dangers of Balloon Payments

Balloon payments can be very dangerous because you can lose your home or property at the very end of your loan if you don’t have a large sum of money, despite having made all of your previous payments on time and as agreed to.

Imagine a scenario where you make every payment for 5 or 10 years on time, then the very last payment is tens of thousands of dollars that you don’t have. You will end up in foreclosure for inability to pay that last balloon payment.

Sometimes, you can refinance your home before the balloon hits, to pay it off, and stay current on your loan. But you may have no idea if, when that time comes, you will have the credit or the equity in the property to do that.

Who Should Use Them?

Balloon payment loans may work, in certain, specific situations.

For example, businesses that need cash now may benefit, because the mortgage payments are lower. If the business expects to be able to save some money, or has something later that is expected to bring in a large cash flow at one time (like a large contract or purchase order), the balloon payment may be beneficial.

If you are convinced that the property will appreciate in value, and you intend to sell it before the balloon comes due, a balloon payment mortgage may have some benefits for you. Balloon payments may work if your intention is to fix up, repair, and then flip property.

We can help you understand the documents you sign in your real estate closing. Contact the Tampa real estate lawyers at the Gilbert Garcia Group, P.A. today.

Sources:

consumerfinance.gov/ask-cfpb/what-is-a-balloon-payment-when-is-one-allowed-en-104/#:~:text=A%20balloon%20payment%20is%20a,the%20end%20of%20the%20loan.

lendingtree.com/home/mortgage/what-is-a-balloon-mortgage-loan/

By Gilbert Garcia Group, P.A. | Posted on February 7, 2023