For the everyday homebuyer, balloon mortgages are a relic of the past — and for good reason. This type of mortgage was widely used in the lead-up to the 2008 financial crisis, leading to strict regulations that make balloon payments incredibly uncommon in modern residential mortgage lending.
While a balloon mortgage may not be ideal for the typical borrower, it may be a good option for real estate investors who plan to fix up a property to resell it or rent it out for a profit.
Before accepting a loan with a balloon payment, make sure you know the risks and understand your options when the loan must be repaid.
[Read: Best Mortgage Lenders]
How Does a Balloon Mortgage Work?
Balloon loans require low monthly payments for five to 10 years, followed by a balloon payment, a large lump sum due at the end of the term to pay off the remaining balance.
Monthly payments are usually lower for a balloon loan than a traditional 30-year mortgage because the lender accepts interest rate risk for, say, 10 years instead of 30, says Evan Swanson, a certified financial planner and loan officer at Guild Mortgage.
“In other words, from the lender’s perspective, they are guaranteed to receive their loan amount back within 10 years,” Swanson says. “Assuming interest rates rise over the initial 10-year period, lenders are then able to re-lend the money for a higher interest rate.”
From the borrower’s perspective, the trade-off for lower monthly payments can be the substantial balloon payment. Swanson gives the example of a 30-year $100,000 loan with a 3.5% interest rate versus a 10-year balloon mortgage.
“The borrower’s monthly payment is based on the amount needed to pay the loan off over a 30-year term,” which in this case is $449.04, he says.
You will make the same monthly payment with the balloon loan, but owe a balloon payment of nearly $78,000 unless you refinance at the end of 10 years.
Note that balloon payments are not allowed for most qualified mortgages, which cannot include certain risky loan features. Most lenders don’t even offer balloon mortgages.
How Is a Balloon Loan Different From Other Home Loans?
The main difference between a balloon loan and other home loans is that the former leaves the borrower with a principal balance at the end of the term and the latter is fully repaid through amortization. The amortization process spreads out principal and interest over time to pay off debt.
Another difference is that a balloon mortgage has a much shorter term of five to 10 years compared with 30 years for a traditional mortgage.
“If you have a seven-year balloon, you will enjoy a monthly payment based on a 15- or 30-year amortization,” says Carolyn Morganbesser, assistant vice president of mortgage originations at Affinity Federal Credit Union. “But at the end of seven years, your loan is due.”
You might pay interest only each month or a portion of interest and principal, but either way, you will owe a lump sum at the end of a balloon loan.
[READ: Compare Current Mortgage Rates]
Pros and Cons of Balloon Loans
Pros
— Balloon loans can have lower interest rates than standard fixed-rate loans because balloon loans must be paid back faster, which means they can be less risky for lenders.
— Paying little to no principal translates into a low monthly payment until the balloon payment is due.
— A balloon loan may allow you to afford more house or get into a home sooner than you would have otherwise.
Cons
— The large final payment can be tens of thousands of dollars.
— If you can’t make the balloon payment, refinance or sell the home, you could lose the property to foreclosure and damage your credit.
— You will accrue little to no home equity if your monthly payments are mostly or entirely interest, and refinancing could be difficult.
Qualifying for a Balloon Loan
If your income or credit is lacking, a balloon loan may not be for you. This high-risk loan requires an excellent credit score, a large down payment and a substantial income.
Overall, the qualification process for a balloon loan is similar to the process for a traditional loan. The lender will ask for proof of income and check your debt-to-income ratio and credit to determine your ability to repay the loan.
The ability-to-repay, or ATR rule, was created by the Consumer Financial Protection Bureau in the wake of the 2008 housing crisis. It’s especially important when it comes to balloon mortgages, since lenders must verify that your income is high enough to make the final balloon payment.
How to Calculate a Balloon Mortgage Payment
When you borrow a mortgage, your lender must disclose if there is a balloon payment on page one of your loan disclosure. This is a document that you receive during the closing process that outlines your loan’s repayment terms.
If you’re not sure whether your home loan has a balloon payment, or if you forgot how much will be due and when, it’s best to look at the closing disclosure for an accurate answer. If you can’t find yours, get in touch with your lender for help.
The easiest way to estimate a balloon payment before you borrow is to use a free online balloon payment calculator available on many bank websites.
Calculators usually require home price, down payment amount, loan term and interest rate to compute your monthly payment and your balloon payment.
[Read: Best Mortgage Refinance Lenders.]
Ways to Pay Off a Balloon Loan
Ultimately, you need cash to make the final balloon payment. You have three options: Save, sell or refinance. Whatever you choose, make sure you have a repayment plan before you apply for a balloon loan.
Save: If you can, save enough money to pay the loan balance when it comes due. This is best if you earn a substantial income or expect an income increase before you make the payment.
Sell: A home will often be sold before the balloon payment is due, and the sale proceeds can be used to pay off the loan.
Refinance: If you want to keep your property, you could refinance the balloon loan by using the proceeds from a second loan to make the balloon payment. However, you’ll need to have sufficient equity in your home to refinance, which can be difficult if you’ve been making low or no-interest payments.
[SEE: Best Home Equity Loans]
Should You Get a Balloon Loan?
Balloon mortgages are relatively uncommon, and they’re not an ideal choice for most borrowers. However, it might make sense to get a balloon loan if:
— You have enough money to cover the balloon payment or are confident that you will receive a lump sum, such as a bonus or inheritance, before it is due.
— You’re seeking short-term financing and plan to sell or refinance the home before you owe the balloon payment.
— You are certain that you won’t stay in the home for long and will sell it before you have to pay the lump sum.
Balloon loans can seem appealing because of their low initial monthly payments, but they aren’t for everyone. Most borrowers today opt for fixed-rate mortgages, says Matt Woods, co-founder and CEO of Sold.com.
“Balloon loans are typically offered for higher-risk lending scenarios, where the lender doesn’t want to offer long-term financing based on the situation at hand,” Woods says.
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What Is a Balloon Mortgage? originally appeared on usnews.com
Update 12/15/25: The story was previously published at an earlier date and has been updated with new information.
