What is a balloon payment?

A balloon payment is a large payment made at the end of a mortgage loan agreement. The borrower and the lender agree on a payment plan for the loan, but the borrower is usually required to make a large payment at the end of the loan term. In the state of Virginia, balloon payments are not permitted in conventional first mortgage loans, such as those offered by banks and credit unions. In Virginia, balloon payments are allowed in certain loans such as secondary mortgages, which are loans taken out after the first mortgage. A balloon payment can be beneficial for both the lender and the borrower. For the lender, the payments are spread out over a longer period of time, allowing for more regular payments. For the borrower, a balloon payment might reduce their monthly payments, making the loan more affordable. However, once the balloon payment is due, the borrower may find it difficult to pay. In Virginia, lenders are required to provide full disclosure of the balloon payment terms prior to loan origination. The borrower must be informed of the potential risks associated with the balloon payment, including the fact that the loan balance may grow if the payment is not made. The borrower should also be aware of any prepayment penalties that may be associated with the loan. In addition, the borrower should also be given the option of a fixed-rate loan in lieu of a balloon payment loan.

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