A balloon payment is a loan where the payments don’t pay off the principal in full by the end of the term. When the loan term expires (usually after 5-7 years), the borrower must either pay a balloon payment for the remaining amount or refinance.
Balloon loans sometimes include convertible options that allow the remaining amount to automatically be transferred into a long-term mortgage (this is known as a convertible ARM, which is an adjustable rate mortgage that can be converted to a fixed rate mortgage under certain circumstances).
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