Definition:
A balloon payment is a larger-than-usual payment due at the end of a loan term. It’s often used in mortgages and other loans to reduce the monthly payments during the initial term. However, the borrower must be prepared to make the balloon payment at the end of the loan term.
Key points about balloon payments:
- Reduced monthly payments: Balloon payments can result in lower monthly payments during the initial term of the loan.
- Large final payment: The borrower must be prepared to make a large balloon payment at the end of the loan term.
- Refinancing: Borrowers may be able to refinance the balloon payment to avoid making a large lump sum payment.
- Risk: Balloon payments can be risky, as borrowers may not be able to afford the large final payment.
Why are balloon payments used?
- Affordability: Balloon payments can make loans more affordable during the initial term.
- Flexibility: They can provide borrowers with more flexibility in terms of repayment options.
However, it’s important to carefully consider the risks and benefits of balloon payments before choosing this type of loan.
In essence, a balloon payment is a larger-than-usual payment due at the end of a loan term, and it can be a good option for borrowers who are looking for lower monthly payments during the initial term but are prepared to make a large lump sum payment at the end.
