Balloon Payment

Financial Dictionary -> Loans -> Balloon Payment

The balloon payment is the final payment to satisfy a balloon loan, where all of the payments are low until a certain date when this larger payment is due. The way this is done is for a mortgage of this type that is taken for five years, the payments annually are interest only payments until the date of maturity. At the date of maturity, the larger payment that is due is the principal of the loan. This principal payment will also have any interest that was not paid off during the length of the loan, due to late payments that were intentional.

This type of loan is known as a fully amortizing loan and is a fixed rate, meaning that the rate of interest will not change during the length of the mortgage or even when reset. The mortgage can also be called a bullet loan and the payments known as a balloon note. These notes or payments are something that first time home buyers look for as their income level is anticipated to rise with age. They are also the type of loan that some people will take to refinance a home that has a small amount owed.

The main problem with the balloon payment is this type of loan has buyer friendly payments until the maturity date when the large payment is due to satisfy the mortgage. This means unless the property has been sold, refinanced or the reset option enacted, they will have had to prepare by putting away money to make this larger payment for the size of the principal of the loan.