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Rookie Reply: Loan Amortization and Balloon Payments Explained
Description
This week’s question comes from Neil on the Real Estate Rookie Facebook Group. Neil is asking: I’m reading a book on financing strategies — if a loan is amortized over thirty years, how is there a balloon payment at fifteen years? What’s the difference between the two?
Most real estate investors don’t run into things like balloon payments until they’ve started taking loans from private lenders or use seller financing. Balloon payments allow investors the chance to refinance earlier or pay off a loan in its entirety while also giving a seller or lender the cash they want.
Considering a balloon loan? Here’s what to know:
A loan is amortized over a set amount of years and interest is usually paid before principal
Balloon payments force the lendee/investor to pay back the unpaid loan amount at a certain year mark
Refinancing, paying off a property, or selling a property are ways to fund a balloon payment
Balloon payments force investors to think further in the future for better exit strategies
And more in the episode…
If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).
Links from the Show
Real Estate Rookie Rookie Facebook Group
Real Estate Rookie Youtube Channel
Check the full show notes here: https://www.biggerpockets.com/rookie134
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