Define Balloon Mortgage The term of a balloon mortgage is usually short (e.g., 5 years), but the payment amount is amortized over a longer term (e.g., 30 years). An advantage of these loans is that they often have a lower interest rate, but the final balloon payment is substantial.
A typical deal might be for the loan to be amortized for 30 years with a balloon payment after five years. "Balloon payment" refers to the repayment of the outstanding principal sum, made at the end.
A balloon loan may be useful when the borrower expects interest rates to be low at the end of the term, allowing him/her simply to refinance the loan. However, there is a high risk of default because not all borrowers actually have the cash to repay an entire loan in one payment. See also: Balloon Mortgage.
A balloon loan will often have the advantage of very low interest payments, thus requiring very little capital outlay during the life of the loan. Since most of the repayment is deferred until the end of the payment period , the borrower has substantial flexibility to utilize the available capital during the life of the loan.
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A balloon payment is a lump sum that you will owe to the lender and is due at the end of the loan term once all the regular monthly repayments are complete. In essence, you are only repaying part of the principal of your loan.
Loan Amortization With Balloon Payment Balloon Mortgage Calculator. This mortgage calculator creates an amortization schedule that shows you how the principal balance on your balloon mortgage changes with each monthly payment. balloon mortgages are not fully amortizing so a large balloon payment must be made at the end of the loan.
What Is a Balloon Loan? Also commonly referred to as a "balloon mortgage payment," a balloon loan operates much like a standard mortgage payment.The borrower is expected to make the normal monthly payments back to the lender over a set period of time.
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Balloon Loan. A loan or bond in which the borrower makes only interest payments for a set period of time. At the end of the term, the borrower repays the entire principal at once. A balloon loan may be useful when the borrower expects interest rates to be low at the end of the term, allowing him/her simply to refinance the loan.
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The loans were called balloon mortgages because the loan ended with a much larger payment than all the previous payments. Since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, traditional balloon mortgages have gone extinct for most homebuyers.