What is a balloon payment loan and what are the pros and cons to this type of loan?

What is a balloon payment loan and what are the pros and cons to this type of loan?

1 Answer

A balloon payment loan is a loan where the monthly payments will not pay off the entire principal balance over the term of the loan.  For example, a 30/15 balloon means that your monthly payments are based on paying the mortgage off in 30 years, but the remaining balance will be due in 15 years.

The primary advantage of a balloon note is that you will have the lower minimum payment of a longer term loan combined with the lower interest rate given to shorter term loans.

The primary disadvantage to a balloon note is the need to pay or refinance the remaining balance at the end of the term of the loan.  If you were to make minimum payments on a 30/15 balloon, your remaining balance at the end of 15 years would normally be 70-80% of the original loan amount.