Seller Financing Question

[Kenneth Crosby]

Good evening! 

I'm looking to see if someone can please explain these terms to me for a seller financed purchase?

20% down. 2 year balloon. 12% interest only.

Thanks in advance!

[Mitch Messer]

Hi @Kenneth Crosby and welcome to BiggerPockets!

You can find definitions for "down payment" (or "down"), "balloon payment" and "interest only" pretty easily here using the Search capability, which is accessed via the magnifying glass icon at the upper-right of each page on the site.

Just for fun, let's work the numbers, assuming the purchase price is $100K:

• The down payment, which is the amount of the purchase that must be paid at the time of closing, would be 20% of $100K, or $20K
• The initial loan balance will be the purchase price less the down payment ($100K - $20K or $80K). This is the amount you'll be making payments on during the financing term.
• Interest only means the monthly payment you'll make will only include interest, not any principal paydown that would go toward reducing that initial loan balance. At 12% of $80K, that's $9,600/year or $800/month.
• A balloon payment means in 2 years you'll be required to pay whatever is left of the initial loan balance, at which time your seller financing will end. In this case, since your monthly payments only cover interest, and not any principal, you'll still owe a balloon payment of exactly $80K after two years.

Hope this helps!