Balloon Payment

A balloon payment is the sum due at the end of a short-term mortgage loan that does not pay off the entire balance.

For instance, say you borrow $50,000. For this type of loan you would pay a set amount, say, $5,000 in 7 years. At the end of the 7 years, the rest of the balance is due. In this case, $45,000. That "rest" (45,000) is the balloon.

Balloon payments can be designed a couple different ways. Some balloon mortgages offer a reset option at the end of the term (7 years in our example). The loan can be rewritten for the balance that remains. The other option is the remainder of the loan being due all at once at the end of the 7 years in a "balloon" payment.

As with anything else, these loans have their advantages and disadvantages. The advantage is the low interest rate they often carry. The disadvantage, though, is that it can be hard to predict your financial future 7 years down the line. If at the end of the loan you find yourself unable to procure another loan, you could lose the house you've been paying on all this time. You definitely want to proceed with foresight, if not caution.