Definition: The term "mortgage with balloon payment" refers to a type of mortgage that allows the borrower to make payments on an adjustable rate loan or a fixed-rate loan, but also provides for a payment at maturity (or end of the loan period) that is based on the value of the home being sold when the loan matures. The purpose of this payment is to cover any equity remaining in the property as it sells and can be used by the borrower if they decide to sell their home before the loan ends.
Here are some key details about "mortgage with balloon payment":
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Definition
: A mortgage that allows for a payment at maturity (or end of the loan period) based on the value of the home being sold when the loan matures. The borrower pays this amount in addition to any initial down payment made by the lender.
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Examples
: Common examples include adjustable-rate mortgages and fixed-rate loans. An example of an adjustable-rate mortgage is a 30-year fixed rate with monthly payments that increase each year, potentially leading to a balloon payment at maturity when the loan matures.
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Benefits
: If the borrower decides to sell their home before the loan ends, they can use this payment to cover any equity remaining in the property as it sells. This allows them to avoid paying off more money than needed, which can save them money over time.
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Risk
: While this type of mortgage provides coverage for any equity remaining after the loan's maturity, it comes with an inherent risk that equity could be lost if the home is sold before or during the maturity date. In such cases, the borrower may need to refinance in order to cover their loss.
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