Repaying Balloon Payments Early
Repaying your balloon payment early
Balloon payments are a common feature of commercial property loans, but many people do not know how balloon payments work or what their options are when they want to repay them early. We’ll go over some tips and strategies for repaying balloon payments early.
Balloon payment basics:
Balloon payments are a lump sum payment of the balance due on a loan at some point in the future. Unlike fully amortized loans, many loans have terms that are shorter than the length of time it would take to pay off the loan in full. For example, a loan that is amortized over 25 years may have a term of 7 years. Thus, at the end of the 7 years, the loan has not been fully paid and the balance must be paid in full on the agreed-upon due date. Lenders like short term loans, especially on commercial property to ensure that they always have their capital invested at market rates. However, borrowers would rather have long term loans because this allows them to avoid having to go through the loan process and pay closing costs all over again.
Balloon payment financing tips:
You may want to refinance your property well before the balloon payment comes due to take advantage of current low rates or to give yourself plenty of time to find another lender before the impending due date of your current note. Often, the original bank that gave you the current loan will not be interested in refinancing your property. If they are, they will most certainly write you another loan with a short-term requiring another balloon payment in a few years. This process is aggravating for property owners. If you would like a longer-term loan that is fully amortized at the end with no balloon payments, we can help you with this process. We have many lenders who have long term(15 –30 years)fully amortized loan offerings for commercial properties.
Repaying balloon payments early can also be achieved by increasing the number of your monthly payments. However, some banks do not allow this strategy without penalties. Check the note document you signed to see if you can make early payments or if the bank allows you to pay off any of the loans early.
Additional payments made toward the balance of the loan can greatly lower your balance due or even eliminate it. However, there are usually additional conditions when doing so.
It’s important to add that paying off a loan early can impact other financial considerations like taxation. Be sure to review these considerations with your accountant and/or attorney.
Balloon payments can be a real problem if you’re strapped for cash. However, you don’t have to tackle this alone; we’re here to help!