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What is a balloon loan?

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What is a balloon loan?

15 Answers

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A balloon loan is usually a five or seven year loan calling for payments which are insufficient to fully amortize the amount of the loan before the maturity date. This creates a balloon payment, which is due at maturity.

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• Secured home equity loan with payments calculated over a longer period than its actual term • Fixed monthly payments do not completely payoff the loan • Remaining principal balance is due at the end as a balloon payment

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A balloon loan is a loan that calls for periodic payments which are amortized over a longer period than the term of the loan. With a balloon loan, a final principal sum known as a “balloon payment” is due at maturity.

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Balloon programs are ideal for borrowers who know they will not occupy the home for long periods of time. For example, the borrower may plan to move in 3 to 7 years and sell the home. Since balloon loans usually have shorter terms (usually five to seven years) than a typical fifteen or thirty-year loan, the interest rate is often less than that on a fifteen or thirty-year conventional loan. A balloon mortgage usually offers many of the features of a fixed-rate loan, such as converting the loan to a longer term in the event of unforeseen changes in the future.

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An amortized fixed-rate loan with monthly payments for a certain period of time, usually 7 or 5 years, and one large payment for the remaining amount of the principal at a time specified in the contract or note. Return to the top of page.