A balloon mortgage is a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract. Also known as a partially amortized loan or mortgage.
Large lump sum payment representing the balance of the mortgage loan. For example, a $2,000,000 loan with a 10-year term and 30-year amortization would have a balloon (or remaining balance of the loan) payment of $1,626,841 at the end of 10 years. The owner will owe this amount to the lender on the 120th payment.
A mortgage with a balloon payment requires monthly mortgage payments for a period of five or seven years, then a balloon payment of the remainder of the mortgage balance. The monthly payments for the period before the balloon is due are usually calculated based on a 30-year amortization schedule. During the monthly payment period, a portion of the principal balance will be paid down, but the balloon payment will be a significant portion of the original loan balance.