A balloon payment is a sum that is bigger than usual and is paid out at the conclusion of the term of a loan. If there is a mortgage with a balloon payment, then the payment amount could be less in the initial years before this is due. However, there may be a larger sum due at the conclusion of the loan tenure.
Balloon mortgages are specialized home or real estate loans. Here, there are nil or lower monthly repayment amounts initially. At the end of a pre-fixed duration, the borrower has to repay the entire loan balance as a lump sum amount. The monthly payments could often involve only repaying the interest amount and are comparatively lower. There are short-term benefits for borrowers with this strategy, although it may be risky in the long haul for lenders.
This method of financing is extensively used across the real estate sector. However, it does bear an element of higher risk for the lender or financial institution. This is because the borrower has to pay a lump sum amount at the end of a pre-agreed period, while repaying only interest through his/her monthly repayment amounts. However, these loans are still granted on the basis of stringent eligibility criteria.
