Balloon Payment - If your loan contains a clause that reads something like, "The entire purchase price and interest shall be fully paid within five years from the date hereof, anything herein to the contrary notwithstanding," then there is what is known as a "balloon" in the loan (a five-year balloon, in this example).

A "balloon payment" is the term used for a large, final payment on the loan. Balloon clauses usually call for the final payment to be made in 5, 10, 15 years, etc., from the original sale date.

If the Borrower fails to make a balloon payment, this constitutes default on the contract. (See the section entitled "Default" for a discussion of your options in the event your Borrower fails to "pop the balloon" by financing the last, large payment owed.

Helpful Hint

It is a good idea to notify the Borrower by letter at least four to six months before the balloon is due. This gives the Borrower plenty of time to find a way to finance or otherwise pay that last, large payment.

For advice on what to do if your Borrower is unable to make a balloon payment, call us. We face these situations frequently and are experienced in exploring all the options available to someone who is owed a balloon payment by someone who can't pay it. We may even be able to provide you with all (or nearly all) of the money owed you by the Borrower without foreclosing or forcing a sale of the Borrower's home.

Interest Rate - The interest rate is stated in annual terms. When recording each payment made, interest is calculated for the payment period (usually monthly) by multiplying the interest rate by the balance due and then dividing this annual interest amount by the number of payments to be made each year. This number (total interest for the period) is then deducted from the payment. The rest of the payment is known as the principal portion of the payment and is deducted from the principal balance remaining on the loan. Sound confusing? It's really not if you follow an example. Consider a transaction that has a sale price of $75,000, a down payment of $10,000, with a Seller take back loan of $65,000, payable with monthly payments at 10%. The interest portion of the first payment will be $541.67 ($65,000 x .10 divided by 12) payments per year and the principal portion of the payment will be $85.59 ($627.26 - $541.67). The remaining principal balance on the loan after the first payment will then be $64,914.41 ($65,000 minus $85.59). (See the "Payment Record Keeper" of this owner's manual to see a brief example of how interest is calculated and how you can easily keep records on your land contract.)