Search This Blog

07 March 2011

Balloon Payment

The term balloon and home loans are far from being related to one another but this is used to explain a form of payment option.
As the term balloon means to float or make big same way it is linked with loans. Balloon mortgage of loan is a type of  repaying schedule of the borrower. Since all loans have to be repaid within a certain time frame and with certain amount of interest rate charged on the loan amount not all tenures are the same. This depends upon the individual borrower and how they wish to repay their loan. This often refers to a short term loan where the interest rate is usually fixed. This may last for maybe 5 to 6 years and the interest rate is normally high which is decided by the lender. Here the borrower has to pay back installments within a certain time frame of years and the last payment is a larger one hence the term balloon payment.
This is beneficial for the borrower who has judgement of his loan repayment capacity and steadily repays his loan amount over the years for a short term. He has assured income generated and is expecting to get payments in large sums after some years. This maybe by a job promotion, gifts, or selling of other property or assets. Then the borrower after this tenure of say 5 or 6 years can pay a large sum to complete the total loan amount. By paying this large sum he can repay the total principal amount and become free from the loan and get complete ownership of the house.

No comments:

Post a Comment

Comment Like Share your views and experiences on Home Loans!