1. A large, lump-sum payment on a loan, most often due at the end of a payback period, such as five or ten years. Essentially, these loans do not fully amortize over the term of the note. If the monthly payments were interest only, for example, the balloon payment could be equal to the original loan.
2. A feature that sometimes shows up in construction loans, as well as first and second mortgages.
3. A type of payment that in theory has advantages for a borrower who can make use of the lower monthly payments by investing the cash that is freed up each month.
4. A loan feature that also creates risk for the borrower, who may not have the resources – or the ability to refinance – to make that final payment when the time comes. if rates have jumped or the owner’s credit has taken a dive, the owner could be forced to sell the property to make the balloon payment. A balloon payment effectively pushes the lender’s rate risk to the borrower, said Dick Lepre, a senior loan consultant in San Francisco. “Borrowers should not be taking rate risk.”
5. A loan type that is supposed to be a temporary tool, said Diane St. James, a mortgage adviser at ABCMortgage.net. Most people can refinance their way out of them.
6. A clause that used to be more common, “Adjustables, when they came out, just kind of did away with the need for balloon mortgages,” St. James said, “Then it’s not ‘Bam! you owe a hundred thousand dollars.’ It’s just a higher rate.”
7. A loan term that fell out of favor for good reason, Lepre said: “you don’t want a balloon loan any more than you want a toothache.”
-The Washington Post