> Balloon Payment

Balloon Payment

A balloon payment is a lump sum payment made at the end of a loan’s term. It is typically significantly larger than the sum of all the previous loan payments. That is generally considered at least twice as large as the previous payments. A balloon payment is not a payment to pay off a loan early. It is instead a specific contractual obligation of a balloon payment loan. 

A balloon payment loan does not fully amortize over the loan term. Full amortization requires that the loan principal be paid by the end of the loan. A traditional home mortgage is accomplished by paying principal and interest monthly, winding down to a zero balance at the end of the loan term. With a balloon payment loan, the payments may be set up to pay only interest during the term of the loan, with the balloon payment paying the principal at the end of the loan.

The advantage of a balloon payment loan is lower monthly payments than traditional loans. They pose a higher risk of non-payment of that lump sum at the end of the term. For that reason, they are typically limited to businesses or high-net-worth individuals. The loan term is much shorter than the traditional 15 or 30-year home mortgage, often five to ten years. One balloon payment loan strategy is to refinance or sell well before the balloon payment is due.