5-year balloon/maturity?

Question

I currently own one single-family and one multi-family. Both are conventional 30-year fixed mortgages. I'm now looking at properties at a lower purchase. I'm dealing with a regional bank and the mortgage banker encouraged me to look at portfolio loans. So I met with the branch president last week and he is willing to work with me. If the first deal works out, he is willing to do more. Here is what he sent me in an email today for the terms...

1. $24,000 loan amount (75% of purchase).

2. 5% fixed rate.

3. 15-year amortization and 5-year balloon/maturity.

4. $240 origination fee.

It all looks good, but as a newbie I don't completely understand "5-year balloon/ maturity". I assume it means that I either need to refinance or pay it off before that five year mark. Is that correct? I'm actually planning to refinance in 30-60 days after I do the rehab and get the tenants in property. So I think this is not a big deal.

I thought I would ask Bigger Pockets for clarity as I didn't want to ask the lender and reveal my ignorance..

Mike

Roy N. · Answer

Michael Wentzel

5-year term mortgages are not that scary - it's the norm here in Canada - where you won't find a mortgage term longer than 7 or 10 years, but can find them as short as 6-months.

There are advantages to having your mortgage renew every 5-years as it gives you the opportunity to shop your business for better terms.   We just rolled two of our mortgages this week with a new lender ... back in August we sat down with our current lender and three others and one wanted our business - met our terms and bettered the others by 0.45% on rate.

Now, where short term mortgages are not as common in the U.S.A. it is possible the lenders won't be as competitive for business as it's not their mainstay.

James Syed · Answer

@Jeff Greenberg you caught it right. I meant 75% LTV. Thank you.

Bill Gulley · Answer

I'd say they are doing you a favor, 24K loan and one point, they must not be busy, grab it.

5 yr. is customary, banks can't take the interest rate risk at 5%. :)

Jeff Greenberg · Answer

@James  Syed are you sure that you don't mean 75% LTV.

Rob K. · Answer

This seems to be pretty common with portfolio loans. The banks don't want to be stuck holding a loan ten years from now at 5% if rates are higher.

Kyle Hipp · Answer

I been getting similar terms. 5%, 15 year ammortization, 5 year balloon. I did not want to perform 2 closings with this financer so I would orginally purchase the property with a land contract or private funds. Then refinance to the commercial note and lull my cash out. This allowed me to put all my personal funds into rehab and nothing in down payment.

As for the refinance, I was able to get the note within a couple months of orignal purchase. I took a month to rehab the property. (This one I did put on the market for 2 months) but then just had to have a tenant in the property with a signed lease and paid up rent for a month with security deposit. This allowed me to get the new valuation and pull cash out. LTV would be 70% andunder. I was quite satisfied on all aspects of these terms.

As for the balloon portion. The VP of lending I worked with said that it is a good idea to contact them about 6 months before then end of the 5 years and get the ball rolling on the re-up. There was a minimal (like $100) resigning fee and the interest rate would reflect market rates.

James Syed · Answer

@Michael W. I forgot to mention, 25% LTV. Sorry for reposting.

James Syed · Answer

@Michael W. That sounds pretty much standard when he didn't roll the rehab cost into the loan because he will have to go for as is value or less. And yes, he will refinance you for updated property and hopefully you will get your acquisition cost + up front cost out.

Again make sure about refinancing period because usually it is 6 month to a year.

Hope it clears further.

James

Michael Wentzel · Answer

@Joel Owens I will double-check about the prepayment penalty. He never mentioned it in the course of a 30-minute conversation. The property we're purchasing is in need of approximately $15,000 of rehab. I asked if he could wrap the rehab costs into the loan. He said he would do the loan for the purchase price on this one and "let" me do the rehab out-of-pocket. The ARV should be around $60,000, so he said we could refinance as soon as the rehab is done and recoup all or most of our cash out of the deal. He did say that he could stretch the amortization to 25 years on the refinance.

@James  Syed I asked specifically if there was a time period I would need to wait for until the refinance. He said "no". I hope to have the place rehabbed and rented in 30 to 60 days. So hopefully the refinance will happen quickly and allow me to take my cash to the next property.

Thanks guys. I am learning.

Mike

James Syed · Answer

@Michael W. I forgot to mention, 25% LTV.