A ballon loan is a short-term fixed-rate loan with low payments for a set number of years and one large final balloon payment of the remainder of the principal. This type of loan is a partially amortized loan.
The advantage of this type of loan is that the interest rate on balloon loans is generally lower that 30 year and 15 year mortgages, which results in lower monthly house payments. The disadvantage is that at the end of the term you will have to come up with a lump sum of money to pay off your lender. It is presumed that if the payments are made promptly, the lender will extend the balloon payment another limited term. However, the lender is not legally obligated to grant an extension.
