How do balloon mortgage works? Indy real estate investors should stay away from them and any other loan.

by | Real Estate Investing, Indy Anna, Uncategorized

How balloon mortgages work and why real estate investors should NEVER use them. 

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How do balloon mortgages work and what real estate investors need to know about them.

Some borrowers and investors are still curious about balloon mortgages. While that initial repayment period can sound appealing and can work in some cases, the end term payment can be tricky for those
that are unprepared.

What is a balloon mortgage?

A balloon mortgage is a mortgage loan that doesn’t fully amortize during the life of the loan, making a lump or ‘balloon’ payment do at the end of the loan terms.

Why the payments can be lower?

A balloon mortgage can be a shorter term loan, spanning from around 2 years to 10.  Sometimes the borrower can make interest payments alone, rolling over remaining interest and principal into the balloon payment due, depending on the loan’s structuring.

Investors might use balloon mortgage as the means to obtain a property for a cheaper monthly payment with the intention of selling the property before the lump or balloon payment is due, using the selling proceeds to make the payment.

This is a bad idea.

Remember that you do NOT need any money or credit to build your real estate business.

There isn’t always an early repayment penalty with this type of loan so selling and repaying early is what some investors do.  That is the appeal and MAYBE your clients and buyers can/should do this, but as a business builder this is something that you should never (have to) do.

When the borrower can’t make the balloon payment?

Often, balloon mortgage loans have built in refinancing terms for refinancing the loan, allowing the borrower to turn it into a traditional 30 year mortgage with the same lender, if they still qualify.

However, some borrowers will choose to refinance with a new lender for better interest rates, again, upon being approved.

In a nutshell the deal with balloon mortgages is simple:

(do NOT do them)

The idea behind a balloon mortgage is to pay little upfront and overtime, until the very end.  For some people, paying this lump sum in the end doesn’t work out ideally as they are faced with refinancing at
the predetermined interest rate and terms of the original loan. 

Those terms as outlined in the making of the loan and/or they current interest rates that the borrower is now subjected to can create problems.  This is especially the case if they to get financed with a totally different lender.

Where problems arise?

When that balloon lump payment is due, and you’re not able to afford the payment, or worse you now owe more than the property is worth… 

You have limited in options.

What are you option with the your balloon mortgage now?

First, you can contact your current lender about working out the deals of refinancing through them if that’s a possibility.  In some cases, you might be able to extend the terms of this loan by a few years.

You can also look elsewhere to refinance the loan, and hope that you get a good rate and are approved for the refinancing.

Balloon mortgage horror stories.

Unfortunately the horror stories of balloon mortgages happen when the home is worth less than what is owed on it.  In that case you when you aren’t able to get refinanced on the loan, this can be where foreclosure begins.

For investors, seeking out a private money loan to cover this balloon payment is one option, but expect paying some portion of the sales return to the private lender.  I’ve even had two different investors that had to pay MORE than the profit from the deal so they had to come out of pocket just get rid of the headache.

Don’t let that happen to you.

In an ideal scenario, when using a balloon mortgage, an investor would have run their numbers so tightly that this balloon payment wouldn’t be an issue. Buying a property at the very best price, and due diligence to make sure the numbers are in your favor will lower the possibility of problems later.

For most people unless you’re sure of the property’s appreciation, very confident with interest rates not going up, your income and credit only improving over time, or coming into money (ex: inheritance or selling a business), a balloon mortgage might not be your best choice.

Actually even then, it almost certainly isn’t.

There is a great post and class on the 38 Ways to Buy Apartment Buildings Zero Down with Pet Policies

The post is HERE.

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Some helpful balloon calculators are at Bankrate, MortgageCalculator and MortgageLoan.com.  If you have any questions please let me know.

Thanks so much!  = )

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Make the Universe Smile.

~ Indy Anna
Love (at) BigReia.com
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