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Balloon Payments - Primary mortgage loans are typically amortized, meaning you pay off the debt through periodic installment payments. For the first few years, the portion of your monthly payment that goes towards paying the interest is much higher than the portion that goes to the principal.

During the final years of the loan, payments will be applied primarily to the remaining principal. If your loan is fully amortized, the loan will be paid back in full when you make your final loan payment.

Although some second mortgages are also fully amortized, the majority of them will have an unpaid balance when the loan term expires. These types of loans are called balloon payment loans. Typically, borrowers will pay only the interest or some combination of interest and principal until the last payment, called the balloon payment, is due, at which time they are required to pay the remaining balance in full.

Though balloon payment loans can be useful for lowering monthly payments or pulling equity out of your current home to buy a new home, extra precaution should be taken before obtaining one because you can risk losing your home if you can't repay or refinance your loan when the final balloon payment is due.

 

 

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