A mortgage on a balloon payment is a mortgage that is not fully amortized over the term of the note, thus leaving the balance due at maturity. The last payment is called the balloon payment because of its large size. Payments of mortgage balloons are more common in commercial real estate than in residential real estate. A balloon mortgage payment may have a fixed or floating interest rate. The most common way of illustrating the balloon loan is using the terminology X because in Y , where X is the number of years in which the loan amortized, and Y is the year when the principal balance is due.
An example of a balloon mortgage payment is Fannie Mae Balloon seven years, featuring monthly payments based on thirty year amortization. In the United States, the amount of balloon payments must be stated in the contract if the Truth-in-Lending terms apply to the loan.
Because the borrower may not have the resources to make a balloon payment at the end of the loan period, a "two step" mortgage plan can be used with a balloon mortgage payment. Under the two-step plan, sometimes referred to as the "reset option", the "reset" mortgage record uses the current market rate and uses the full amortization payment schedule. This option is not always automatic, and may be available only if the borrower is still the owner/occupant, has no late payments thirty days in the previous twelve months, and has no other liens against the property. For a balloon payment mortgage without a reset option or where reset options are not available, the expectation is whether the borrower will sell the property or refinance the loan at the end of the loan term. This may mean there is a risk of refinancing.
Customized mortgage rates are sometimes confused with a balloon mortgage payout. The difference is that balloon payments may require refinancing or repayment at the end of the period; some adjustment rate mortgages do not need to be refinanced, and the interest rate is automatically adjusted at the end of the applicable period. Some countries do not allow mortgage balloon payments for housing: lenders must resume lending (reordering option is required). For the borrower, therefore, there is no risk that the lender will refuse to refinance or resume the loan.
A piece of related jargon is bullet payment . With bullet repayments, payments are paid back when the loan matures on its contract (for example, when it reaches the deadline set for repayment when the loan is granted), represents the full loan amount ( also called main ). Periodic interest payments are generally made over the life of the loan.
Video Balloon payment mortgage
Amortization
The typical arrangement to repay a housing loan is called amortization payment or amortization .
With amortization, the principal parts are repaid periodically (together with the payment of interest on the loan) until the loan matures. By full amortization , the amortization schedule has been set so that the last periodic payment consists of the final portion of the outstanding principal.
With partial amortization, balloon payments will still be required upon maturity, which includes part of the outstanding amount of the loan. This approach is very common in automotive financing where balloon payments are often calculated with respect to the value of the vehicle at the end of the financing period - so the borrower can return the vehicle in lieu of balloon payments.
Maps Balloon payment mortgage
Prevalence
Balloon payments or bullet payments are common for certain types of debt. Most bonds, for example, are non-amortized instruments where coupon payments only cover interest, and the full value of the bond's nominal value is paid at the final maturity date.
Risk refinancing
Balloon payments introduce certain risks for both the borrower and the lender. In many cases, the borrower's goal is to refinance the amount of balloon payments on the last due date. Refinancing risks exist at this point, since it is possible that at the time of payment, the borrower will not be able to refinance the loan; the borrower faces the risk of having insufficient liquid funds, and the lender is at risk that payments may be delayed.
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Source of the article : Wikipedia
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