Many commercial properties come with a substantial price tag. Businesses that don’t want to incur such a significant cash expense turn to a variety of financing options.
One of the financing structures offered in commercial real estate is a balloon loan. Balloon loans typically have shorter terms (only a few years) and require monthly payments during the life of the loan, followed by one large balloon payment at the end of the term to pay off the remaining balance.
Compared to a traditional mortgage or fixed loan, where the total loan amount is amortized over many years, balloon loans can be a much riskier means of financing.
What to Know About Balloon Loans
Here are a few things you need to know about balloon loans:
- Length: Unlike more traditional loans that have a length of 15-30 years, balloon loans commonly have only a few-year term.
- Cost: In some cases, borrowers will select a balloon loan and plan to refinance down the road. If, however, the owner continues to refinance repeatedly, the fees and closing costs from each refinance can make a balloon loan a costly financing option.
- Refinancing: If borrowers are not making large enough fixed payments to keep up with the loan’s interest rate, a lender may not be able to refinance a balloon loan as there will not be enough equity. A lender may require an additional down payment to consider a refinance.
- Fixed Payments: One perk of a balloon loan is that the monthly fixed payments are typically lower than other types of financing.
- Balloon Payment: While the fixed payments are lower, some borrowers can be caught off guard by the size of the balloon payments. The final balloon payment can be as high as a hundred times the fixed payment, so it’s critical that a business understands the risk and has enough income to meet the final payment.
Funding Your Commercial Real Estate Investment
Funding your commercial real estate investment the right way is the path to long-term success. Be sure to discuss your options with a commercial real estate broker and lender before committing to a specific type of financing.
If you have questions about commercial real estate, please contact Steve Longenecker and Northern Colorado Commercial Real Estate at WeBrokerCORealEstate or 720-600-9513.
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