What Is a Mortgage Loan With a Balloon Payment?

A balloon payment on a mortgage is when one or more later installment payments are higher.

A balloon payment is typically considered to be the final installment payment on a loan that is higher than the other payments, according to the Business Dictionary. Conventional mortgages are paid in even installments except for the final payment, which often is a little higher to complete the amortization.

Basics

A higher final loan payment is fairly common and can occur intentionally or unintentionally. Sometimes, an error in previous payments or late payment fees can lead to extra remaining balance before the final installment is due.

Balloon Payment Mortgage

Mortgage that include planned increases in monthly loan payments after a specified period of time have been popular in the early 21st century. Considered by many to be a leading cause of the housing market slump beginning in 2006 to 2007, according to the Jewish Policy Center's inFocus Quarterly in Summer 2008, balloon mortgages were popular with buyers who traded low payments up front for much higher balloon payments several years into a loan.

Drawbacks

Pre-planned balloon payment mortgages were purchased by homeowners who figured they would have more income when the payments climbed. However, many were unprepared for the sharp jump. The Federal Truth in Lending Act of 1968 includes requirements that lenders disclose key factors of balloon payments on mortgages or face financial penalties.

References

• BusinessDictionary: Balloon Payment Definition
• The Community Investment Network: Federal Truth in Lending Act of 1968 Highlights
• The Jewish Policy Center inFocus Summer 2008: Understanding the Housing Crisis