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Balloon payment

A balloon payment is a single large payment of principal required in a loan agreement, often a mortgage.

Expanded Definition

This is yet another creative financing device from the days when buyers stretched to afford mortgages in very hot real estate markets. In the extreme, the payment schedule requires interest only with a balloon payment due on a specified date. The size of the balloon payment usually forces refinancing, and if equity has been created by rising home values, it might be possible to finance for a lower interest rate. But if the housing values have fallen creating an underwater loan, the result is often foreclosure.

This is another abusive mortgage scheme based on the idea that housing values will continue to increase. Many got in trouble with this kind of financing.

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