What is a Balloon mortgage? A Balloon mortgage is a financing mechanism where the payments are not fully amortized over the term of the loan. Sometimes the borrower needs to pay only the interest on the loan. As the loan is not fully amortized the borrower needs to pay a large sum of money at maturity, in some cases the full principal to close the loan. As the closure amount is often large, this is called a Balloon payment.
In a balloon mortgage, the loan is not amortized over its life. As a result, the borrower has to make a substantial amount, called balloon payment, in
order to close the loan. A balloon mortgage is similar to a normal mortgage loan. The only difference between the two is that in a balloon mortgage a substantial sum
of money, called the balloon payment, needs to be repaid to the lender after a certain stipulated period of time, say 5 or 7 years, in order to close the loan.
This mechanism is popular in the domain of commercial real estate. In some cases, the borrower refinances the balloon mortgage with a normal mortgage
when the balloon payment is very high.
Balloon mortgages can be common, and they have the advantage of lower initial payments. They can be preferable for people who have near-term cash flow issues but expect higher cash flows later, as the Balloon payment nears. The borrower must, however, be prepared to make that Balloon payment at the end of the term. Sometimes the lender will roll that amount into a new mortgage for the borrower. This is often called a two-step mortgage.
Using this calculator consider also the benefit of prepaying a loan.
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Related Mortgage Terms
||The amount borrowed or the remaining unpaid balance of a loan excluding unpaid accrued interest; also refers to the portion of the monthly payment that reduces the outstanding balance of a loan.
||The time frame when a loan line of credit must be repaid. The most common mortgage terms are 15 years and 30 years.
||The cost a customer pays to a lender for borrowing funds over a period of time expressed as a percentage rate of the loan amount.
||The frequency of prepayment. The options are none, monthly, yearly and one-time payment.
||Amount that will be prepaid on your mortgage. This amount will be applied to the mortgage principal balance, based on the prepayment type.
||This is the payment month number that your prepayments will begin with.
||Total of all monthly payments over the full term of the mortgage.
||Total of all interest paid over the full term of the mortgage.
||Total amount of interest you will save by prepaying your mortgage.
||Large payment due at the end of a balloon loan