Balloon Payment

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DEFINITION of 'Balloon Payment'

An oversized payment due at the end of a mortgage, commercial loan or other amortized loan. Because the entire loan amount is not amortized over the life of the loan, the remaining balance is due as a final repayment to the lender.

Balloon payments are often prepackaged into what are called "two-step mortgages." In this type of mortgage, the balloon payment is rolled into a new or continuing amortized mortgage at the prevailing market rates.

Balloon payments can occur within a fixed-rate or adjustable-rate mortgage (ARM).

BREAKING DOWN 'Balloon Payment'

The average homeowner could not make a balloon payment at the end of a mortgage, even if substantial principal payments were made over the life of the loan. Because of this, most homeowners and borrowers plan in advance to either refinance a mortgage near the balloon-payment date, or simply sell the home before the maturity date.

Balloon payments can be a big problem in a falling housing market. As house prices fall, the odds of homeowners having positive equity in their homes also drops, and they may not be able to sell their homes for the prices they anticipated.

Homeowners looking to reset their mortgages can usually do so if they have not been late on their payments, entered foreclosure or lost a substantial portion of their household income.

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