Legal Definitions - balloon mortgage

A balloon mortgage is a type of mortgage where the borrower makes payments that are not enough to pay off the entire loan during the amortization period. This means that at the end of the loan term, the borrower must make a large payment to fully pay off the loan.

For example, a borrower might have a monthly mortgage payment of $500, but at the end of the loan term, they must make a final payment of $2,000 to pay off the loan in full.

Balloon mortgages are often used for commercial mortgages, where developers take out a balloon mortgage with the intention of refinancing later with a traditional mortgage. However, if the developer is unable to refinance, they may be in a difficult financial position.

For instance, if a commercial developer takes out a balloon mortgage to finance a new building, they may plan to refinance the loan after the building is completed and occupied. However, if the economy takes a downturn and the developer is unable to secure a traditional mortgage, they may be unable to make the final payment on the balloon mortgage, which could result in foreclosure.