A balloon mortgage can be structured with a variety of terms and maturities, however what they all have in common is the large lump sum due at the end of the term. A lender may promote a balloon mortgage as a good deal by highlighting the low monthly payments, but the sad reality is that when the large lump sum is due at the end of the term, many businesses or individuals are not in a position to repay the remaining balance and are forced to refinance. While refinancing is not always an ideal situation, for business owners with commercial real estate debt, there is an advantageous solution. If you are faced with refinancing a balloon mortgage, the SBA 504 loan can very beneficial and offer big savings.
Understanding Balloon Payments and Fully Amortized Loans
When you take out a conventional loan, you negotiate a number of conditions, including the amortization period and the term of your loan. The amortization period is the length of time the loan payments are based upon. The term of the loan is the length of time you will be making these payments.
When the amortization period and term are the same, there is no balloon payment. This type of loan is referred to as “fully amortizing.” With a fixed interest rate, you pay the same amount every period until the end of the loan. If the loan is not fully amortized, it is possible that you will have a 25-year amortization period and a 5-year term. At the end of those five years, you will have a balloon payment due that is equivalent to 20 years of payments rolled into one.
The SBA 504 Loan
The Small Business Administration (SBA) 504 Loan Program is designed to make property ownership affordable for small and mid-sized businesses. It allows business owners to purchased fixed assets with only 10 percent down and a long term, below-market rate fully amortized over 25 years. SBA 504 Loans NEVER come with a balloon payment. Monthly payments are fixed for the life of the loan, providing small business owners with affordable payments that enable them to control overhead costs for the long term. Today’s SBA 504 refinance interest rate is a remarkably low 3.71 percent fixed for 25 years.
While SBA 504 Loans are most commonly used to purchase real estate, they can also be obtained to cover construction costs or to refinance commercial real estate debt.
Refinance a Balloon Mortgage with a 504 Loan
The SBA Refinance Program was made to help ease the financial burdens of small business owners and allows conventional loans to be refinanced with better terms. You can avoid or drastically reduce a balloon payment by refinancing with an SBA 504 loan, which is always fully amortized.
A 504 loan can be used to refinance:
- the purchase of land or buildings
- the construction of buildings
- the purchase of equipment with a service life of ten years or more
- the improvement, upgrade or renovation of buildings
The loan must be at least two years old. You can refinance up to 90% of the current value of an eligible property, or 85% if the refinance includes cash out for eligible business expenses (salaries, rent, utilities, inventory, etc)
The 504 refinance loan has three parts:
- The first mortgage is provided by a conventional lender, representing approximately 50 percent of the total project cost
- The SBA 504 second mortgage, representing generally 40 percent of the total project cost, has a long-term, up to 25 years, and FIXED interest rate, fully amortized for the full term of the loan
- You, the borrower, contribute at least 10% equity to the loan as down payment. The equity in the property being refinanced typically covers this requirement
Support from a Certified Development Company (CDC)
When it comes to financing or refinancing, things can get confusing. Another perk of the SBA 504 loan is that a Certified Development Company, such as TMC Financing, is there to support you every step of the way. They’ll help create the most optimal financing package for your project and guide you through the application process and beyond. Designed to be a small business’ advocate, a CDC is a great resource for small business owners looking to purchase or refinance commercial real estate.
You can find out more about obtaining a 504 loan or using the 504 loan to refinance your current mortgage from one of TMC Financing’s 504 loan experts. TMC is the No. 1 CDC in the nation, providing small business owners throughout California and Nevada with affordable financing. With nearly 40 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.