Refinancing to pay off a seller-financed deal balloon?

[Dan Kossoy]

Hey community! New investor here, pardon any noob questions and appreciate your input.

Working on structuring a seller-financed deal that would include a balloon payment at the end (say, after 10 years). In that 10th year, is it possible to do some sort of conventional refinance in order to pay off the balloon?

Putting example numbers to it:

Balloon of 400k is due to the owner after 10 years. At that time, the house appraises for 500k. If I start a new mortgage with the bank, will they give me a check for 400k (80% of the 500k) that I could pass on to the seller to clear the balloon? From there, I'd make monthly payments to the bank to repay the 400k they lent? Any more details about this process I should know about? Anything I'm overlooking?

Thanks to all in advance.

[Sean Bramble]

Yep. In general you want to structure your balloons in a way that ensures you have enough equity at the payout date that you can refi without having to come out of pocket. Some add a clause that says the house has to appraise for x at the time of the balloon, else it extends by x years.

Another objective would be to make sure you’re still cash flowing after you refi, and I’ve heard of other clauses that say mortgage rates have to be below x for the balloon payment to be paid.