The term Balloon payment means a lump sum payment which is related to the loan, mortgage, or a commercial loan. This payment is generally made towards the end of the loan period. The balloon payment is higher than what you might be paying towards the loan on a monthly basis. So, the Balloon payment is the part is the part which is both fixed as well as a flexible interest rate structure. By attaching the balloon payment to the loan, the borrower can cut down on the interest payment, which is being made monthly by the borrower. This is only possible when the entire loan is not amortized.
The good thing about balloon payments is that they have the lower initial payments. This payment method is ideal for the borrowers or companies who are facing a cash crunch in the short term. Although, the expectation for liquidity is to improve in the future.
So, a balloon payment is a considerable part that is to be made at the end of the balloon loan. This type of loan is mainly intentionally structured for early payments. This payment must be made during the loan term to be more minor or for the later payments. But sometimes this last payment gets higher. Balloon payment, as mentioned earlier, can be of different types. Mortgage, commercial loan, or any type of amortized loan is similar to bullet repayment.
A balloon payment structure can be levied on any type of debt, even in the real estate sector. It is mainly seen in the industries like mortgage and auto loans, which differ from traditional loans in each sector.
In a mortgage, the borrower secures a balloon mortgage where the final mortgage payments are higher than the initial payments. Here, a lender does not wait for the traditional 15-30 years of age; instead, the lenders often implement five to ten years of the term.
In balloon mortgages, the interest is only available for the high net worth individuals with sufficient cash flow that offers a sizeable down payment. These loans are mainly taken out to be refinanced before having the balloon payment.
Sometimes, balloon mortgages are confused with the adjustable rate mortgage. But the borrower receives an introductory rate before setting an amount.
On the other hand, balloon loans are not commonly used in the auto-loans. However, this structure generally works especially well for people who are urgent to secure a vehicle but might not have the current income to support the higher monthly payments.
