Definition
A balloon payment is a lump sum payment that is due at the end of a mortgage that does not fully amortize over the mortgage term. Such a mortgage is sometimes referred to as a balloon note.
Analysis
A balloon payment is a feature of many predatory mortgage loans, in which the homeowner often is expected to pay far in excess of what normal mortgage loans require and still owe money at the end of the mortgage. The balloon payment is often a substantial percentage of the original loan amount, with very little of the principal having been paid due to excessive loan interest rates.
Once the balloon payment becomes due at the end of the mortgage term, the homeowner must pay it off. Rarely does the homeowner have this amount of money on hand. Instead, the homeowner must get another loan on the home to repay the balloon note. The subsequent loan is normally a loan with predatory terms as well, since many subprime borrowers rely on the same greedy mortgage brokers that took advantage of them the first time.
Homeowners seeking a mortgage should always avoid mortgage contracts that contain a provision for a balloon payment. A housing counselor can help homeowners through the mortgage qualification process so that they understand the types of loans they can qualify for.
