Bullet loan

What is a Bullet Loan?

A bullet loan, also known as a balloon loan, is a type of loan that requires the borrower to make a single lump sum payment at the end of the term. This feature distinguishes it from traditional loans, where the borrower makes regular payments of both principal and interest over the life of the loan.

For homeowner associations, bullet loans might be an attractive option when funding major projects. These could include significant repairs, renovations, or improvements to properties. Since bullet loans do not require repayment of the principal over the life of the loan, associations can avoid high monthly payments. This can be beneficial for cash flow management.

However, bullet loans also pose significant risk. The association must ensure it has sufficient funds at the end of the loan term to make the large lump sum payment. There is also the risk of interest rates rising over the term of the loan, which can increase the final payment amount.

How Does a Bullet Loan Work?

A bullet loan typically works as follows: The borrower (in this case, the homeowner association) receives the full loan amount upfront. Over the course of the loan term, the borrower only pays interest on the loan. At the end of the term, the borrower makes a large lump sum payment to pay off the principal.

It’s important for homeowner associations to thoroughly evaluate their financial position and future cash flow before deciding to take out a bullet loan. Professional financial advice should be sought to help assess the potential risks and benefits.