A balloon payment is a large payment due at the end of a loan’s life. This type of payment usually occurs over the life of a short-term loan, which has only been amortized partially over the course of the loan’s term. The balloon payment is the final repayment of the loan’s remaining balance.
For example, if a buyer takes out a five-year balloon loan for $500,000, he has five years of equal loan payments at a lower rate than what it would take to secure the same loan under a traditional mortgage. At the end of the five-year term, the buyer must either repay or refinance the balloon payment that still exists.
