Balloon Loan

A type of loan whose term is less than the length of the amortization. It is usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract. For example, a 5-year balloon is one in which the loan matures in 5 years but is amortized for 30 years. [Translation: the monthly payments are calculated for a 30-year payback period (so they're lower); but after five years, the loan term expires and the borrower must repay or refinance the entire remaining balance.] The balloon loan interest rate and monthly payments are lower than standard fixed-rate loans, but the entire principal balance is due at the end of the term—hence a large balloon payment. The most typical balloon loans are 5-year and 7-year balloons, although 10-year and 15-year balloons are also available. For more information, see the "Balloon Loans" article in the "Loan Programs" section.

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