The start of a new year is an excellent time for churches and ministries to review their budgets, as well as to determine opportunities for ministry growth. One avenue for expansion is the construction of new facilities or updating of current ones, which often requires a church to consider some form of financing.
Applying for a loan for your church or ministry can be a daunting task. There are many different types of loans and various conditions to consider when going into the process.
One type of loan is a balloon payment mortgage. A balloon payment mortgage, also known as a balloon loan, does not fully amortize over its term, meaning that, at the end of the term, the borrower is required to repay the remaining balance. This final payment is called a balloon payment because of its large size. Lenders typically refer to these as term loans and even fixed rate loans.
Balloon loans are typically short-term, usually from three to seven years. The monthly payments in this type of loan are not calculated to cover the entire loan repayment; instead, payments are calculated as if the loan is a standard 30-year mortgage. Therefore, at the end of the five-to-seven-year term, the borrower has repaid only a portion of the principal balance, and the remainder is due all at once.
Balloon loans are more common in commercial real estate than residential real estate. Generally, loans have balloon payments to offset the lower amount of money that the borrower would put into a loan agreement. Placing a large, fixed sum final payment on the loan allows the lender to lower the interest rate and the monthly repayments while minimizing the lender’s long-term credit risk.
Some balloon loans have a “reset option,” in which the mortgage resets at the end of the term, utilizing current market rates and a fully amortizing payment schedule. However, this option is not automatic and may only be available under certain conditions. If a balloon loan does not have the reset option, the borrower is expected to pay the remaining loan balance or refinance the loan by the end of the loan term. This situation often causes significant stress and places the ministry in a vulnerable position.
There are some advantages to balloon loans. These loans often give borrowers access to a low interest rate. But the disadvantages often outweigh the positives, as there is no guarantee that the borrower will be able to refinance at that same lower rate—or will be able to refinance the loan at all. As a result, the borrower may have no choice but to default on the loan.
Choosing a balloon loan requires the borrower to rely on a lot of if’s—this type of loan is advantageous if property values continue to appreciate, if the borrower’s income and credit capacity do not decrease, and if interest rates remain low. Many financial experts expect interest rates to rise in the near future, creating even more uncertainty related to loan rates. Churches and ministries should think twice before deciding to take on a balloon loan.
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