Balloon Mechanics

Although the monthly payments of a balloon loan are calculated with a long-term amortization of (usually) 30 years, the balloon has a relatively short life.

At the end of the balloon's term—often called the balloon's maturity—the loan will have a large loan principal balance still remaining. The borrower must either pay off, in full, or refinance this remaining balance. This final, very large "balloon" payment is the origin of this program's name.

If the property is sold during the balloon's term, the loan balance is obviously paid off completely with the proceeds of the sale.

To provide a deeper understanding of balloon loans, this article looks at three elements of balloon programs:

  1. Amortization
  2. Variations
  3. Conversion Option

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