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Definition of 'Balloon Mortgage'

Definition: A balloon mortgage is a financing mechanism where the payments are not fully amortized over the term of the loan. Sometimes the borrower needs to pay only the interest on the loan. As the loan is not fully amortized, the borrower needs to pay a large sum of money at maturity, in some cases the full principal, in order to close the loan. As the closure amount is often large, this is called balloon payment.

Description: In a balloon mortgage, the loan is not amortized over its life. As a result, the borrower has to make a substantial amount, called balloon payment, in order to close the loan. A balloon mortgage is similar to a normal mortgage loan. The only difference between the two is that in a balloon mortgage a substantial sum of money, called the balloon payment, needs to be repaid to the lender after a certain stipulated period of time, say 5 or 7 years, in order to close the loan. This mechanism is popular in the domain of commercial real estate. In some cases, the borrower refinances the balloon mortgage with a normal mortgage when the balloon payment is very high.

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