There are various types of Financing for anyone who wants to buy commercial properties.
Each form of Financing is analyzed by weighing the pros and cons in light with the position and the needs of the loan borrower.
But one thing to note is that, not every commercial real estate investor is in a position to afford loans that have high down payments.
However, this sole factor cannot stop them from being a part of the real estate business.
Time is of greatest essence in the world of real estate and the one who is able to arrange for funds and get the best deal is the one who can make high profits.
So does that mean investors who cannot arrange large funds will have lesser chances of making profits in real estate?
The simple and straight answer is NO.
That is where other forms of Financing like loans and commercial mortgages come into picture!
In the world of real estate, balloon payments are considered as a boon for those who cannot afford to spend lot of money in down payments or cannot commit to monthly recurring out of pocket expenses on account of loan clearance.
Here’s all you need to know about Balloon payments and how they work in commercial real estate refinance.
What are balloon payments?
A balloon payment refers to the total lump sum paid at the end of a loan’s term which is significantly larger than all other payments made until then.
Balloon payments allow the borrowers to reduce there fixed monthly payments in exchange for making one huge payment at the end of loan’s term.
These loans help borrowers who cannot bear huge down payments for processing the commercial mortgage.
On a general note, these loans are the best for commercial mortgage borrowers who have a good credit score and are sure of substantial income at the end of a loan’s term.
Understanding loans with balloon payments made easy
Balloon loans are also generally understood as being at least twice as regularly scheduled payments.
By allowing the borrowers to make one large payment at the end of a loan’s term, these loans will help borrowers to lower their monthly loan repayment costs during the initial times of paying back the loan.
Balloon loans typically have shorter terms than the traditional installment loans.
Balloon loans are often said to be a complex financial product and should be used only by qualified stable income borrow wa stable income borrowers.
These loans are best suited for business owners or commercial real estate investors who need immediate financing but are sure of future earnings.
In other words, it is best for people who have predictable future income and are in need of immediate Finance.
What is the role of balloon loans in commercial real estate mortgages?
Balloon loans have different roles in commercial real estate mortgages. It helps in financing an immediate urgent fund requirement.
But the most common use of balloon payments when it comes to a commercial real estate is the commercial real estate refinancing.
To put it in simple words, balloon loans are usually taken to pay back an already outstanding loan.
Although there are different ways in which refinancing Commercial real estate loans can be done, refinancing through balloon loans is one of the most widely used ways because there are no bars on the initial down payment.
When the commercial real estate investor has no funds to repay a loan which is due, balloon loans are the easiest and safest resort as it does not require huge initial down payment cost or monthly loan repayment costs.
Pros and cons of balloon loans
Understanding about the role of balloon loans in commercial real estate mortgages would become much easier if we have a look at the pros and cons of balloon loans.
This will also help you in better decision making. Here we go.
Pros of balloon loans:
Number 1 – Low or no initial payments
Balloon loans do not require high initial payments. There are some banks and private capital investors who are willing to provide these loans at almost zero initial payment.
But that requires the borrower to have a very high credit score or a good understanding with the banker or his or her private money lender.
Number 2 – Helps borrower to arrange an affordable immediate fund
Many a time, it has so happened in the history of real estate that a particular borrower wasn’t able to get the best deal because he was unable to arrange for funds at the required time.
We all know that timing is important when it comes to real estate and thus ballon loans can be considered as a boon that helps borrow was acquired a huge fund without having to worry about arranging for use down payments on an immediate basis.
Number 3 – Balloon loans have no time constraints at the time of processing
Balloon loans, unlike other traditional loans, do not require a lot of documentation and paperwork before these loans are processed.
This saves a lot of time to the loan borrowers and thus helps them grab their best deals.
Also, the additional time that would be otherwise required in order to arrange for the immediate huge down payment would also be cut down when it comes to balloon loans.
Number 4 – One of the best ways for commercial real estate refinancing
Since the balloon loans are short term loans and do not require huge down payments it is one of the best ways for commercial real estate refinancing.
Also, you might need expert advice on refinancing commercial real estate
Cons of balloon loans
Number 1 – Total costs associated with the loan maybe high in the long run
Although there are no initial down payment costs or the monthly loan repayment costs, the balloon payment that happen at the end of loan’s term can prove to be higher than other traditional loans.
Number 2 – Huge burden at the end
Balloon loans that carry very low initial down payment costs often have huge one-time last payment at the last and this could be a big burden.
If you do not plan your income and cash flow for paying the last huge payment, it would be an issue.
There were some of the pros and cons of balloon loans.
One has to make a decision of opting for a balloon loan or not by considering the other financing options, the need, the credit score and the income stability of the loan borrower.
However if you sure about the future predictable income balloon loans maybe the best option for you!