Balloon loans

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David Daly
David Daly's picture
Balloon loans

Hi Jason,

When is it preferable to take a balloon loan?

Thanks, David

Jason Pride
Jason Pride's picture

Hi David,

A balloon loan would be preferable if:
a) You have the cash available to make the purchase but can invest it at a higher rate of return than the interest rate on the loan.
b) You believe that loan rates will be lower when the balloon payment comes due and the remaining debt can be refinanced at a lower rate.
c) You are expecting an influx of cash (from the sale of other property for example) prior to the balloon payment.

Balloon loans took a major blow in the real estate/financial market downturn, but they are not all bad. New regulations have made them more consumer friendly. However, low initial payments and interest rates can still fool borrowers into believing that the loan terms are favorable when they may not be.