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What Are Balloon Payments?


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TERMINOLOGY

Balloon payments are a type of payment that is commonly offered in the mortgage industry today. Here are the basics of the balloon payment and how it works.

The Balloon Payment

A balloon payment is a large payment at the end of a loan to satisfy the remainder of the principal and interest. Many mortgages are set up to have a balloon payment at the end of the term. Borrowers like this type of payment because it provides them with a way to make smaller payment throughout the life of their mortgage. For example, many mortgages only require the borrower to make a payment that covers the interest each month. None of the principal of the loan is actually being retired as part of the payment. Then at the end of the mortgage, the borrower has to come up with the entire amount of the loan all at once for the balloon payment.

Problems

Although many borrowers like balloon payments, they have caused problems for a number of people in the past. Many people do not plan ahead for the balloon payment and then do not have enough money to pay it off. When this happens, they can potentially lose their home or be forced to refinance the loan.