A balloon mortgage is a mortgage whose payments are not large enough to pay off the entire mortage during its amortization period. Thus, the borrower must make an extra-large payment at the end of the amortization period to fully pay off the loan. For example, a balloon mortgage on a home might have a $500 month normal mortgage payment, and require a final payment of $2,000.
Balloon mortgages are most commonly used for commercial mortgages. Sometimes, commercial developers take out a balloon mortgage, planning to refinance later with a traditional mortgage. This strategy can put the developer in a very bad position if they are unable to refinance. This problem is increasingly frequent due to the recent economic turmoil.
See Debtor and Creditor law.
Definition from Nolo’s Plain-English Law Dictionary
A mortgage that is not fully paid off over the loan term (such as five, seven, or ten years), leaving a balance at the end. The borrower must either pay off the remaining mortgage or refinance the loan.
Definition provided by Nolo’s Plain-English Law Dictionary.
August 19, 2010, 5:11 pm