What Is a Hard Money Loan Balloon Payment?
If you’re thinking about getting a hard money loan to finance your next real estate investment, it’s crucial to understand all the repayment terms–especially balloon payments. Unlike traditional mortgage loans, many hard money loans are structured with interest-only payments and a large lump-sum payment due at the end of the loan term. This final payment, known as a loan balloon payment, can easily catch borrowers off guard if they’re not prepared. So, today, we’re discussing hard money loan balloon payments, how they work, how to calculate how much you owe, and more.
Contents of This Article:
- What Is a Hard Money Loan Balloon Payment?
- How Does a Balloon Payment Work?
- How to Calculate a Hard Money Loan Balloon Payment
- Do All Hard Money Loans Have Balloon Payments?
- Find the Right Lender for Your Next Investment
What Is a Hard Money Loan Balloon Payment?
When you get a hard money loan, the repayment terms are generally structured a bit differently than traditional mortgage loans. For instance, many Maryland fix-and-flip loans come with interest-only payments during the loan term, followed by a large lump-sum payment, known as a balloon payment, that’s due at the end.
This final payment is meant to cover the entire remaining loan principal. Because of this, borrowers need to have a clear exit strategy, such as selling the property or refinancing before the loan term ends. Without a well-thought-out plan in place, you risk defaulting on the loan or running into financial issues when the balloon payment is due.
How Does a Balloon Payment Work?
A balloon payment works by deferring the majority of the loan’s principal to the end of the loan term. That said, throughout the term, usually 6 to 24 months, you’ll typically make interest-only loan payments. Then, once the loan matures, you’re required to pay the entire remaining principal in one lump sum.
For instance, if you borrow $200,000 with interest-only payments, you might pay monthly interest for 12 months, then owe the full $200,00 as a balloon payment at the end. This structure helps keep monthly payments low, but it also requires careful planning to repay or refinance the loan before it comes due.
How to Calculate a Hard Money Loan Balloon Payment
Calculating a balloon payment on a hard money loan is pretty straightforward–especially if the loan is interest-only. Since you’re not paying down the principal of the loan during the term, the balloon payment is usually the full loan amount.
So, for example, if you take out a $150,000 hard money loan with a 12-month interest-only term, you’ll pay interest each month but still owe the full $150,000 at the end. That lump sum becomes your balloon payment.
However, if your loan is partially amortized, meaning you pay down some of the principal during your term, the balloon payment will be smaller. In that case, you calculate the balloon payment by subtracting the principal paid from the original loan amount.
For example, let’s say you borrow $150,000 on a 12-month loan, and each month you pay $1,000 toward the principal. After 12 months, you’ve paid down $12,000 in principal. So, your final balloon payment would then be $138,000.
No matter the structure, understanding how your balloon payment is calculated can help you plan ahead. That way, you’re not caught off guard when the final payment is due at the end of the term.
Do All Hard Money Loans Have Balloon Payments?
No, not all hard money loans have balloon payments. However, many of them do. Most of them are structured as short-term, interest-only loans with a balloon payment at the end. However, it’s also possible for lenders to have different repayment structures, like fully amortized loans where the principal is paid down over time.
Because of this, it’s crucial to understand your loan terms before signing. Always ask your lender whether a balloon payment is required and how much it will be. After all, knowing this upfront can help you plan your exit strategy and avoid unexpected financial pressure at the end of your loan term.
Find the Right Lender for Your Next Investment
Hard money loan balloon payments can be a powerful tool in real estate financing–only if you understand how they work and can plan accordingly. Whether you’re looking at a fix-and-flip project or a short-term investment, knowing your repayment structure is key to avoiding financial strain down the line.
If you’re looking for a lender with transparent terms, fair loan payment structures, and a supporting team by your side, look no further than Maryland Hard Money Lenders. Our team can help you complete your next investment project successfully. Learn more about our lending process or fill out our initial loan application today!
