What is ballooning payment/Loan in Finance?
A balloon loan is a type of loan that does not fully amortize
over its term. Since it is not fully amortized, a balloon payment is required
at the end of the term to repay the remaining principal balance of the loan.
Balloon loans can be attractive to short-term borrowers because they typically
carry lower interest rates than loans with longer terms. However, the borrower
must be aware of refinancing risks as there's a risk the loan may reset at a higher interest
rate.
Example of a Balloon Loan
Let's say a person takes out a
$200,000 mortgage with a seven-year term and a 4.5% interest rate. Their
monthly payment for seven years is $1,013. At the end of the seven-year term,
they owe a $175,066 balloon payment.
Source: Internet
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