What is a balloon payment?
A balloon payment is a hefty sum fee paid to discharge a balloon loan such as a
mortgage, a commercial loan, or any amortized loan. A balloon loan is usually for a comparatively short term which only a part of the loan’s principal is amortized over that specific period. The outstanding balance is usually due for final payment at the end of the term.
The term “balloon” symbolizes the large final payment. Typically, balloon payments are at least double the amount of the loan’s previous installments.
Most homeowners and borrowers plan earlier to either refinance their mortgage as the balloon payment nears, or sell their home before the loan’s maturity date. These types of fees can create some problems in a falling housing market. As house values decrease, the chances of homeowners having positive equity in their houses also drop, and they might not be able to trade their homes for the value that they anticipated. Borrowers usually have no option but to default on their loans and start foreclosure, despite their household incomes, when faced with a balloon payment they cannot afford.