Balloon Loans: What is a balloon loan?

A balloon mortgage loan is a loan in which the final payment is much larger than all of the previous payments. To illustrate this lets use home loans as a typical example. Usually if you finance your home for a 30 year period with a 30 year amortization, it is agreed upon that you will pay the same monthly payment for 30 years or 360 months. With a balloon loan or mortgage you will agree to make mortgage payments based on a 30 year amortization but you will also agree to pay the balance of the loan in 15 years by making one big final payment in the 15 th year.

The above example is simply an example. You should note that the amortization and term in which a balloon loan needs to be paid off will vary depending on the mortgage lenders specific program. It may have to be paid off in as little as 5 years.

Most people cannot afford to pay off their mortgage balance in such a lump sum so they will usually refinance and chose a different program

What is the advantage of a balloon loan?

The main advantage of a balloon loan is that the interest rates are typically lower. If you know that in a few years you will be selling your home or if you are simply looking for an initial lower mortgage payment a balloon mortgage is definitely to your advantage.

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