Partially Amortized Loan, (Balloon Loan)

A balloon mortgage is a type of loan that features smaller monthly payments for a specified period, typically five to seven years, followed by a lump-sum payment, or "balloon payment," for the remaining balance at the end of the term. Here are the key points to remember:

1. Structure: Initially, the borrower makes regular monthly payments that are typically lower than traditional mortgage payments. These payments may cover only the interest or a portion of the principal.

2. Balloon Payment: At the end of the loan term, the borrower must make a large lump-sum payment to repay the remaining principal balance. This is known as the balloon payment.

3. Interest Rates: Balloon mortgages often come with lower interest rates during the initial payment period, making them attractive for borrowers who expect to have the funds to make the balloon payment or plan to sell or refinance before the balloon payment is due.

4. Risk: The primary risk is that the borrower might not have the funds to make the balloon payment when it comes due, which could lead to financial difficulties or foreclosure if the borrower is unable to refinance or sell the property.

5. Suitability: Balloon mortgages are suitable for borrowers who anticipate an increase in income, plan to sell the property before the balloon payment is due, or expect to refinance under more favorable terms before the lump-sum payment is required.