Loan Terminology: Amortization Schedules & Balloon Amounts
What's that mean? 'Amortization' is banking terminology for "schedule of payments" - so a "fully amortizing 5 year loan" simply means that at the end of the 5 year loan term, the principal balance (the amount you borrowed) has been completely amortized, or paid back.
A 'balloon' means that when the loan expires after 5 years, you have NOT paid back the entire principal amount yet. With a balloon loan, at the end of the loan term, you will need to either pay off the remaining principal balance, or refinance it with a new loan at the current interest rates.
Why would you want a balloon loan? Since monthly payment amounts on balloon loans are calculated over a longer time frame (15 or 20 years) they can be significantly lower than the monthly payment needed to pay off the entire balance in 5 or 10 years. When the loan expires, you can either pay it off or refinance it at the current interest rate - which may be higher or lower than interest rates right now.
If you need a lower payment now to fit into your current budget, and you anticipate your income will be greater in 5 years so you can manage a potentially higher payment then - or you're planning to sell your home within the next 5 years (and pay off your home equity loan) - a longer amortization schedule with a balloon balance at the end of 5 years could be the right choice for you.
For information on Principal Bank's Home Equity Loan terms, click here.
