Mortgage Dictionary

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Balloon Loan

A balloon loan is a type of short-term loan. Initially, it works like a traditional mortgage, requiring regular monthly payments of principal and interest. Then, after a period of time (usually between 3 to 10 years), it becomes 100% due. At that time, the borrower must pay the loan off in cash (referred to as the balloon payment) or refinance.

Warning Borrowers who take on a balloon loan assume that they will have the funds a few years later, when they must make the balloon payment. If they do not have the funds (or cannot acquire them), they risk losing the home. This can occur, for example, if the housing market changes and it becomes unexpectedly difficult to refinance.

Payments for a balloon loan can be based on a fixed-rate mortgage or on an adjustable-rate mortgage (ARM) . In either case, the interest rate on a balloon loan is usually lower than the interest rate on a normal 30-year, mortgage.

See also:   Fixed-Rate Mortgage | Adjustable-Rate Mortgage (ARM)