What is a balloon loan?
In some respects, a balloon loan looks very much like a 30-year fixed-rate mortgage (FRM). The payments are calculated in exactly the same way. In both cases, the payment is the amount required to pay off the mortgage in full over 30 years. Where the two instruments differ is that, after a specified period, generally 5 or 7 years, the outstanding balance (the “balloon”) has to be repaid in full. [Note: In 2006, 15-year balloons became fairly common, but as the second mortgage component of piggyback arrangements used to avoid payment of mortgage insurance on loans with down payments of less than 20%. See What Is a 15-Year Balloon? The financial crisis that erupted in late 2007 resulted in the disappearance of piggyback balloons.] For example, on a $100,000 loan at 6%, the payment on a 7-year balloon and a 30-year FRM is $599.56. On the balloon, however, the balance of $89,638 after 7 years has to be repaid in full. If the borrower is still in the house, unless he has come into a windfal
