Some mortgage lenders offer what is called a balloon payment loan, and this loan is a little different than the typical mortgage loan. These loans require one or more balloon payments in addition to the regular monthly payments. A balloon payment is a large lump sum that is due all at once, whether there is one balloon payment made at the end of the balloon loan or several balloon payments that are spaced out over set intervals of time. These loans are normally used for mortgages, but can be used for auto or personal loans as well.
There are a few disadvantages to a balloon loan, one of the most obvious being the large lump sum that is due at once. For a real estate investor who can not budget or does not sell the property when expected, then the balloon payment may become a problem. Some loans may allow for the balloon payment to be converted into a more traditional loan, but this should be verified with the lender before investing in the real estate if there is any doubt about the ability to make the balloon payment. If this option is not allowed by the lender and you can not make the balloon payment then it is possible you could lose the investment property to the balloon loan provider.
There are several advantages to using a balloon payment loan when investing in real estate. One of these advantages is that there is normally a substantially smaller down payment required for these loans than a standard loan. Another great advantage of a balloon payment loan is a lower monthly payment each month in compensation for the large balloon payment due. There is also a lower interest rate that is fixed for the life of the loan. For a real estate investor this means less money out of pocket to start and again each month, and this money can be wisely invested instead. For an investor who plans to sell the property before the balloon payment is due at the end, a balloon payment mortgage may save thousands of dollars in interest and monthly payments for the investor. Money saved is the same as money earned, and your savings can be invested to make an even better return on your investment. It is not a good idea to invest money saved by using a balloon payment mortgage in any high risk venture, however, until after the balloon payment is paid off to avoid any chance of a loan default by not making the required balloon payment.
Whether you use a balloon payment mortgage or not is something that you should consider very carefully before deciding. The rewards for a real estate investor who takes out a balloon payment mortgage can be very good, but the risks can cost the entire investment if you do not have the capital to make the balloon payment. You should only use a balloon payment loan if you know that there is going to be a large lump sum available to make the big payment, or if you are a good investor who can put aside small amounts each month so that the capital is there when the big payment becomes due.