Learn something new every day
More Info... by email
As an alternative to making payments on a loan or mortgage that are equal in size and type for the duration of the loan period, there is the possibility of a balloon note. Essentially, a balloon note allows for the extension of a mortgage or loan, with the provision that the regularly schedule payments will be low. At the end of the loan period, a substantial payment will be required to pay off the remainder of the outstanding balance. Here are some examples of when a balloon note arrangement may be a sound financial move.
Balloon notes are often utilized within business operations. One of the advantages of structuring a long-term loan as a balloon note is that it provides a corporation with a relatively low amount of resources required to meet the monthly obligation of the loan. At the same time, the balloon note arrangement provides the company with time to build up additional resources that can be used to retire the debt when it comes due. Companies that anticipate additional sales from the launch of a new product or service often find the option of a balloon note attractive. Another possibility is that there is an expectation of an increase in sales of existing offerings. Many companies with this type of projection see the balloon note as a great way to buy what they need today, and defer a huge payment until later, when more resources are available.
Along with long-term loans to businesses, the balloon note is sometimes used in real estate as well. A mortgage can be arranged to include balloon payments. This is typically structured to allow for a series of reduced monthly payments, capped off with one large balloon payment at the end of the mortgage period. Balloon payments can be attractive, as it allows the property owner to take advantage of lower monthly payments and possibly a better rate of interest on the mortgage as well. The important thing is to make sure the resources will be there to meet the last large payment of the balloon note, or stiff penalties are usually incurred.
As a means of providing creative financing, the balloon note has proven to be a viable option for many different types of consumers. With the convenience of smaller installment payments and in some cases lower interest rates, the balloon note is ideal for anyone who is sure he or she will be able to make that one last large payment on time.
@LisaLou- I think that the problem with balloon loans is that people rely too much on the future without considering what would happen if they are unable to pay the note at the end of the term.
A lot of people got mortgages like this during the housing bubble because they thought that they would be able to take the gains from their home and quickly sell it and be done with the mortgage.
People were able to do this for a while, but when the housing market tanked they were really stuck because they were not able to refinance the home because it was now worth less than the mortgage, and selling the home was also difficult
because many of these homes were worth about half of what the seller’s owed.
I personally would never get a balloon loan for this reason. I rather get a fixed rate loan that allows me a chance to make regular payments towards the loan.
Many years ago I remember having a balloon note mortgage that I thought was a wise investment at the time.
I think we ended up refinancing our loan before the balloon note was due, because I don't remember coming up with a large sum of money at the end of the note.
This is something that I wouldn't do again. I would rather know how much I have to pay every month and stretch it out across the length of the loan rather than have one large lump sum payment at the end.
In some situations I can see where this would be beneficial if you were getting a much lower payment and would be in a
position in several years to have a large sum of money.
I guess I am not disciplined enough for this to work for me. I was too worried that I wouldn't be able to make that final payment, and wanted to go back to a fixed loan.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!