Real estate word of the day today is balloon mortgage. So first we’re going to define the word, then we’re going to use it in a sentence, and then we’ll have a quick little discussion about it.
So a balloon mortgage is a mortgage loan that requires the remaining principal balance to be paid off at a specific point in time. For example, a loan may be amortized as it would be paid over a 30 year period, but requires that at the end of the 10th year, the entire remaining balance must be paid.
OK, so that’s the definition that we have here and then the to use it in a sentence, we would say that a balloon mortgage typically would represent a little more risk to the borrower than a traditional 30 year fixed mortgage. Now, the reason for that, that it would have more risk be because simply you would have to pay it off early, refinance it or do something else.
In the example, in the definition, it was due in 10 years. So it was fully amortizing, meaning you would make payments as if it was a 30 year loan. And then after 10 years, you would have your full payment that is due and it would balloon and be all at once. So at that point, you would have the option to either refinance it or to pay it off in full or, you know, you’d be in a bad spot. So the probably it was individually financed by an individual and they want their money all at one point. And that’s why it would balloon or come due at that time frame.