What Is A Balloon Payment? Balloon Loans Explained
Abstract
How Does A Balloon Payment Work? As you might imagine, balloon payments are more common for commercial mortgages than residential mortgages. If the reset is not approved for some reason, the balloon payment will be due instead. Balloon Payment Qualifications The federal Truth in Lending Act lays out the requirements that banks must follow before issuing any loans. Are Balloon Payments Legal? In and of themselves, there's nothing illegal about balloon payments. The Truth in Lending Act, for example, defines a balloon payment as a payment that's two or more times the ordinary monthly payment, and requires lenders to disclose any such payment to the consumer. The formula to calculate a balloon payment is: FV = PV*(1 r)n-P*[(1 r)n-1/r] Here's a quick explanation of the variables: FV is the final value of the balloon payment. Disadvantages Of Balloon Payments During the 1970s real estate boom, balloon payments were part of ordinary, everyday payments. These mortgages paired interest-only monthly payments with a final balloon payment.
