Balloon payment.
In plain English
A balloon payment is a single large amount due at the end of a loan whose earlier payments were too small to clear the balance. Some mortgages and auto or business loans are structured this way: you make modest monthly payments for a few years, then owe the entire remaining balance at once. The appeal is a lower monthly payment during the loan; the danger is that the final payment can be tens of thousands of dollars, and borrowers often have to refinance or sell to cover it. If they cannot, they risk default.
01Why it matters
The low monthly payment hides a large sum due later, so understanding when the balloon comes and how you will cover it is essential before signing.
02The math, step by step
A 200,000 dollar balloon mortgage has low payments for seven years, then a final balloon of about 175,000 dollars. The borrower must refinance, sell, or pay that lump sum in full when it comes due.
03What this is NOT
A balloon loan is NOT fully amortizing. Its regular payments do not pay off the balance, so a large lump sum remains due at the end, unlike a standard loan that reaches zero with the last scheduled payment.
04Receipts
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