Before we get to the actual balloon payment, I want to talk about amortization schedules. In my contract with you, I'm going to insist on a regular amortization the way a bank would. None of that "Every $800 payment will be $200 towards the house and $600 interest"* stuff for me. That works out for you as the Buyer much better than a regular amortization schedule would, so I'm not going for it. Besides, regular amortization schedules are standard for contracts for deeds. With every payment you make the amount of principal paid will go up while the amount of interest will go down. (This is a link to my favorite amortization calculator, and you can use it to see how amortization works if you're not already familiar with the concept.)
[*However, if I was in your position as the Buyer, I'd definitely suggest that kind of payment arrangement to the Seller! Worth a shot.]
So what is a balloon payment, anyway? A balloon payment is a single payment when all the rest of the money owed on the contract is owed all at once. Yep, every penny.
So the date the balloon payment is due becomes a major deadline for you. By the time the balloon payment gets here, two or three years from now (or whatever length of time we agreed on) you will have to get your hands on a large enough amount of money to pay me off. Usually, the only way to do that is to refinance your home loan, typically with a bank or other commercial lender. So between now and then you had better be working on getting your credit situation in order! That's actually one of two main reasons to sell on a contract for deed:
· you get some time to fix whatever credit problems you might have so you can get a regular mortgage with a regular bank, and
· it's easier to refinance your home (the house you are buying from me is your house, just like anyone else who buys a house with regular financing) once you own it and have made payments for a while than it is to finance it in the first place.
So if you're careful with your credit you should be able to refinance when the time comes. If you can't, you are in danger of losing the house altogether, but that's a subject for another time.
Any questions on balloon payments?
Next up: your interest rate.