Balloon Payment Definition
A balloon payment is a large, lump-sum payment made at the end of a long-term loan. It’s called a “balloon payment” because the final payment inflates, or “balloons,” to a size much larger than the regular monthly payments. This type of payment is often used in mortgage loans, commercial loans, and certain types of personal loans.
Balloon Payment Key Points
- A balloon payment is a large, one-time payment made at the end of a loan term.
- It is often used in mortgage loans, commercial loans, and certain types of personal loans.
- The balloon payment is typically much larger than the regular monthly payments.
- Loans with balloon payments often have lower initial monthly payments.
- Failure to make the balloon payment can result in the loan defaulting.
What is a Balloon Payment?
A balloon payment is a large payment that is due at the end of a loan term. This payment is significantly larger than the regular monthly payments made during the term of the loan. The purpose of a balloon payment is to reduce the size of the regular payments, making the loan more affordable on a month-to-month basis. However, the borrower must be prepared to make a large payment at the end of the term.
Why is a Balloon Payment Used?
Balloon payments are used to make loans more affordable on a monthly basis. By deferring a large portion of the loan to the end of the term, the monthly payments can be kept lower. This can be beneficial for borrowers who expect to have more income in the future, or who plan to sell the asset (such as a house) before the balloon payment is due.
Where is a Balloon Payment Used?
Balloon payments are commonly used in mortgage loans and commercial loans. They can also be found in certain types of personal loans. In a mortgage, the balloon payment may be due at the end of a 5, 7, or 10-year term, after which the borrower must either pay off the balloon payment, refinance the loan, or sell the property.
When is a Balloon Payment Due?
A balloon payment is due at the end of the loan term. The exact timing will depend on the terms of the loan. For example, in a 7-year balloon mortgage, the balloon payment would be due 7 years after the loan was taken out.
How is a Balloon Payment Calculated?
The size of the balloon payment is calculated based on the total amount of the loan, the interest rate, and the term of the loan. The balloon payment is the remaining balance of the loan that has not been paid off through the regular monthly payments. This means that the balloon payment will be larger if the monthly payments are smaller, and vice versa.
