What is a Balloon Loan?

A Balloon Loan has lower debt payments than a fully amortized loan up until a lump sum payment at the end of a term.

Balloon loans have relatively low monthly payments due over their term and then a large lump sum payment for the remaining balance at the end. This can be advantageous if someone or a business knows they will be paid in a certain way that fits well with this schedule.

Other people and businesses may be planning to use a more flexible approach where the lump sum due at the end is rolled into a new financing schedule (such as a two-step mortgage), and this is usually done if there is a reset provision in the contract.

If there is no reset provision, the borrower will need to either be prepared to make the balloon payment or to refinance with a new loan before it comes time to make the balloon payment.

In either case there is a refinancing risk, meaning if things have changed in the market or with the client’s financial situation the refinanced arrangement may be worse for him or her than the original one was.

What is Mortgage Modification?
What is a Balloon Payment?