Balloon Loan

AAA

DEFINITION of 'Balloon Loan'

A type of loan which does not fully amortize over its term. Since it is not fully amortized, a balloon payment is required at the end of the term to repay the remaining principal balance of the loan.

INVESTOPEDIA EXPLAINS'Balloon Loan'

Balloon loans can be attractive to short-term borrowers because they typically carry a lower interest rate than a loan with a longer term. However, the borrower must be aware of refinancing risk and/or the risk that the loan will reset at a higher interest rate.

Some balloon loans, such as a five-year balloon mortgages, have a reset option at the end of the five-year term that allows for a resetting of the interest rate (based on current interest rates) and a recalculation of the amortization schedule based on a remaining term. If a balloon loan does not have a reset option, or frequently even when it does, it is expected that the borrower will sell the property or refinance the loan before the end of the original loan term.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Refinance

    1. When a business or person revises a payment schedule for repaying ...
  3. Balloon Maturity

    1. A repayment schedule for a bond issue where a large number ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Balloon Option

    An option contract where the strike price increases significantly ...
  6. Term

    1. The lifespan assigned to an asset or a liability, over which ...
Related Articles
  1. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  2. Budgeting

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  3. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  4. Options & Futures

    This ARM Has Teeth

    Find out how to avoid getting bitten when your mortgage rate resets.
  5. Entrepreneurship

    Steps to Qualify For a Small Business Loan

    Learn steps to qualify for a small business loan such as identifying financing needs, preparing a business plan and getting required documents.
  6. Credit & Loans

    The Lurking Dangers of Student Loans

    Student loans are popular, but they present many dangers.
  7. Retirement

    Is Cohousing Right for You?

    Cohousing isn't for everyone. But if you're community-minded or committed to living green, it may be an ideal option for you.
  8. Professionals

    Why Millennials Might Not Be Ideal Clients

    Here's why luring millennial clients might be a waste of time (for now).
  9. Home & Auto

    Are Home Inspections Worth It? - Price vs. Value

    If you’re wondering whether home inspection is worth the investment, the following information will help you decide.
  10. Credit & Loans

    What's a Bridge Loan?

    A bridge loan is a loan that “bridges” a borrower over a temporary shortage in funds on hand.
RELATED FAQS
  1. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  2. What is the difference between accrued revenue and accrued interest?

    The difference between accrued revenue and accrued interest is that the former represents accumulated income that has not ... Read Full Answer >>
  3. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  4. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  5. What are the typical requirements to qualify for closed end credit?

    Typical requirements for a consumer to qualify for closed-end credit include satisfactory income level and credit history, ... Read Full Answer >>
  6. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  2. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  3. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  4. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  5. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  6. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!