Seller Financing: Payments & Balloon Risk

Amortization and maturity are different

Amortization describes how scheduled payments reduce principal. Maturity is when the remaining debt becomes due. A note can use a long amortization schedule but mature much sooner, leaving a balloon balance. An interest-only note does not reduce principal through its regular interest payments.

The example uses a $50,000 seller note at a fixed 6% annual interest rate with monthly interest-only payments and principal due after five years. It is a hypothetical schedule, not an offer or a recommended financing structure.

A small payment can hide a large payoff

Interest-only payments on this note are $250 per month. After 60 payments, $15,000 of interest has been paid, but the $50,000 principal still needs to be repaid. Paying interest is not the same as building a principal repayment fund.

With $1,700 monthly NOI before debt and a separate $1,000 bank payment, combined debt service is $1,250. That leaves $450 before any costs excluded from NOI. Accumulating $50,000 over 60 months would require about $833.33 per month without investment earnings—more than that modeled cash flow.

Plan for the obligation, not an assumed refinance

A future refinance or sale is not guaranteed. Model lower property value, tighter lending terms and insufficient cash at maturity. Different repayment terms, fees or prepayment rules change the calculation.

• Ask qualified legal and lending professionals to review the written structure, title and existing-loan restrictions.
• Confirm the exact interest, amortization, maturity and balloon terms.
• Include taxes, insurance, operating reserves and all debt obligations in the property budget.