how bullet repayments work
bullet repayments and balloon loans are not normally amortized over the duration of the loan the final balloon payment is often the only principal payment made but the balance might occasionally be amortized through other smaller incremental payments before the balloon payment comes due the final payment is nonetheless significantly larger than the others and it retires the loan the deferral of principal payments until the loan matures results in lower monthly payments during the life of the loan because these payments usually represent only interest but this presents a significant risk to borrowers who aren t prepared to make the large lump sum payment or who don t have other arrangements in place to deal with the bullet repayment bullet repayments have also been integrated with fixed income based exchange traded funds etfs giving them bond like predictability for investors bullet repayment vs amortizationthe difference between interest only payments on a loan with a bullet repayment and amortizing mortgage payments can be quite significant for example the yearly interest would be 9 600 and monthly payments would be 800 on a 15 year interest only mortgage of 320 000 with a 3 interest rate that same loan with amortization would have a monthly payment of 2 210 the monthly payment schedule clearly favors the interest only loan but the interest only borrower faces a bullet repayment of 320 000 example of etf bullet paymentsthe investors assume the role of lenders in etfs with bullet repayment dates while the funds act as the borrowers funds with bullet repayments are usually composed of bonds notes and fixed income vehicles with maturities preceding the bullet repayment date investors receive regular interest payments on their shares during the term of the fund and they re repaid the principal from the matured portfolio holdings on the bullet repayment date the key benefit of the bullet repayment for investors is the predictability of the return of principal on a specified date much like the maturity of a bond special considerationsa borrower basically has two options if money is not available to pay a loan in full as the bullet repayment date approaches the property can be sold with the proceeds used to pay the loan principal or the loan can be refinanced taking out a new loan to cover the bullet repayment under certain circumstances balloon lenders might offer borrowers the option to convert loans to traditional amortizing loans rather than face a huge one time payment 