Your Real Estate Promissory Note Business – Balloon Payment

What is a Balloon Payment on a real estate promissory note?

If you are opening a small business to assist in the sale of a promissory note you are going to need to know as much about the process as possible, including what a balloon payment is.

Quite simply it is a large payment built into the terms of the loan, and almost always at the end.

An example of a Balloon Payment built into a real estate promissory note would be, where the terms of the note specify the borrower making equal monthly payments based on amortizing the loan over 30 years, but making the balance due after only ten years.

Based on this example the borrower gets to enjoy a smaller monthly payment for ten years, but then must pay the balance of the entire mortgage - a Balloon Payment - based on the terms at the end of the ten year period.

A Borrower that intends to sell or refinance the property prior to the ten year period will enjoy the smaller payments. This could allow the borrower to add value to the home during this time without the larger monthly payments, and then sell the home prior to the balloon payment.

If the borrower intends to refinance later this could be an advantage or disadvantage depending on what the market interest rate is at when they decide to refinance.

The Seller will receive the entire amount sooner than a more traditional 30 year mortgage.

This could be an advantage or disadvantage depending on what the market interest rate is going to be at the end of the ten year period. Of course Seller's are motivated by all kinds of things that prompt them to place a balloon payment in the real estate promissory note.

Typically if the real estate promissory note has a balloon payment built into the terms at the end of around ten years, it generally adds value to the note and makes it more attractive to a Note Investor.

Certainly there are many other factors a Note Investor will consider. We will discuss all of these on this website.

Thank you!

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