Balloon Loan

A balloon loan can be defined as a loan that is not completely amortized at its due term. Since the loan is not fully amortized or it is not fully repaid a balloon payment is required to repay the full principle amount of the loan that was left remaining with the borrower. Balloon loans are usually short term loans and they are more attract full to the borrowers that are interested in a short term loan with a low interest rate as the interest rate associated with the long term loans is a bit higher and borrower are unable to pay that huge rate of interest. However there is a risk of refinancing associated with the loan and the borrower must understand that the higher interest rate is associated with the readjustment of the loan.

A number of balloon loans that are operated as short term loan and on a monthly repayment mortgage can be readjusted or reset at the end of the term say the 5 years of the term. The interest rate associated with the resetting of the loan will be similar to that of the interest rate that is currently offered in the market. Along with the altered interest rate the mortgage associated with the loan is also recalculated on the basis of the present term and the time associated with the term. This means that the amortization time of the readjusted loan is also recalculated. If the balloon loan comes with no reset option than the borrower has to sell the property or he has to refinance the loan in any condition before the term is completed.

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