What does "Balloon loan" mean?

Definition

A balloon loan is a type of mortgage with a large lump sum payment, called a balloon payment, due at the end of the loan term. This type of loan is considered non-traditional.

Understanding Balloon Loans

Balloon loans typically become part of the conversation when exploring short-term financing options. They feature smaller monthly payments during the term with a large final payment at the end. Imagine a $100,000 loan with smaller payments, then a final $70,000 due at the end. Balloon loans can be attractive if you plan to sell or refinance before the large payment is due. It's not a loan where the entire balance is paid off through regular monthly payments.

People Want To Know

Are balloon payment mortgages a good idea?

Balloon payment mortgages can be risky due to the large lump sum due at the end of the term, which can lead to financial strain if not properly planned for. They are often used for short-term financing and may have lower monthly payments, but borrowers must be prepared for the full payment, which can be substantial.

What happens at the end of a 5 year balloon mortgage?

At the end of a 5-year balloon mortgage, the borrower must pay a large lump sum, known as the balloon payment. This payment typically covers the remaining principal balance of the loan, which is due in full at that time. If the borrower cannot pay the balloon payment, they may need to refinance the loan or sell the property.

Can you pay off a balloon loan early?

Yes, you can pay off a balloon loan early. Most lenders allow early repayment without penalties, but it's essential to check the loan agreement for any specific terms or conditions. Additionally, paying off the loan early can save you on interest costs.

Flip the Script - Master mortgage objections

More From The Mortgage Glossary

Biweekly payment

A biweekly payment plan involves making a mortgage payment every two weeks instead of once a month. This results in one extra full payment per year, helping you pay off your loan faster.

Break-even point

The break-even point is the moment when the money you've saved from a lower interest rate equals the upfront cost of getting that rate. This helps you determine if a particular financial decision, like buying mortgage points, is worthwhile.

Bridge loan

A bridge loan is a short-term loan used to bridge the gap between buying a new house and selling your old one. These are typically short-term loans.