Table of Contents

Balloon Mortgage: Definition, Examples, Pros & Cons

By

澳洲幸运5官方开奖结果体彩网:Julia Kagan

Updated February 09, 2025

Reviewed by

Thomas Brock

Realtor shaking hands with smiling couple outside house for sale — Ariel Skelley / Getty Images

What Is a Balloon Mortgage?

A balloon mortgage is a real estate loan with an initial period of low or no monthly payments. The borrower pays off the full balance in a lump sum at the end of the term. The monthly payments, if any, may be 🦄interest only, and the interest rate is commonly low.

Key Takeaways

A balloon mortgage is a real estate loan with an initial period of low or no monthly payments.
A balloon mortgage is usually short-term.
The borrower pays off the full balance in a lump sum at the end of the term.

How Balloon Mortgages Work

Balloon mortgages can be structured with varying terms and maturities and may have fixed or variable interest rates. Some short-term loans may require the borrower to make the principal and interest repayments at maturity with no 澳洲幸运5官方开奖结果体彩网:amortization over the life of the loan.

Balloon mortgages can also charge interest-only payments, allowing borrowers to make low monthly payments before repaying the lump sum when it is due. In one variation on the balloon mortgage, called the 澳洲幸运5官方开奖结果体彩网:balloon payment mortgage, the borrower pays a set interest rate for a certain number of years. The loan will reset with the balloon payment rolli🍸ng into a new or continuing amortized mortgage at the prevailing market rates at the end of that term.

Pros & Cons of Balloon Mortgages

Pros

Low paymen🐎ts for homeownersও who plan to stay in the home for a short period
Low payments prior to a 澳洲幸运5官方开奖结果体彩网:refinance strategy when lower future interest rates 🐻are anticipated
Payment strategy for homeown🌠ers who are paid in lump sum bonuses to pay off the balance

Cons

Slow or no equity building with a balloon mortgag⛎e when interest-only payments ar⭕e made
Difficultyܫ in changing terms of loan or refinancing t♐he mortgage
Long-term risk i𝕴f homeowner is unable to accumulate and save lump sum payment

Examples of a Balloon Payment Schedule

A homebuyer may take a seven-year balloon mortgage of $150,000, paying $🃏531.25 in interest-only payments each month. Throughout the life of the loan, those payments wouldn’t change, but neither would the balance due on the mortgage. At the end of the term, the buyer owes $150,000.

A balloon loan of $300,000, with a longer term of 17 yea✅rs and a buyer paying both interest and principal each month, would look like the below, with a balloon payment of $35,000 due at the end of the term.

Payments on a $300,000 Balloon Loan
Month	Payment	Interest	Principal	Balance
1	$2,028.57	$1,062.50	$966.07	$299,033.93
2	$2,028.57	$1,059.08	$969.49	$298,064.44
3	$2,028.57	$1,055.64	$972.92	$297,091.52
4	$2,028.57	$1,052.20	$976.37	$296,115.15
5	$2,028.57	$1,048.74	$979.83	$295,135.33
6	$2,028.57	$1,045.27	$983.30	$294,152.03
7	$2,028.57	$1,041.79	$986.78	$293,165.25
8	$2,028.57	$1,038.29	$990.27	$292,174.98
9	$2,028.57	$1,034.79	$993.78	$291,181.20
10	$2,028.57	$1,031.27	$997.30	$290,183.90
11	$2,028.57	$1,027.73	$1,000.83	$289,183.07
12	$2,028.57	$1,024.19	$1,004.38	$288,178.69
183	$2,028.57	$190.12	$1,838.45	$51,841.83
184	$2,028.57	$183.61	$1,844.96	$49,996.87
185	$2,028.57	$177.07	$1,851.49	$48,145.38
186	$2,028.57	$170.51	$1,858.05	$46,287.32
187	$2,028.57	$163.93	$1,864.63	$44,422.69
188	$2,028.57	$157.33	$1,871.24	$42,551.45
189	$2,028.57	$150.70	$1,877.86	$40,673.59
190	$2,028.57	$144.05	$1,884.51	$38,789.08
191	$2,028.57	$137.38	$1,891.19	$36,897.89
192	$2,028.57	$130.68	$1,897.89	$35,000.00

Source: Rocket Mortgage

Warning

Defaulting on a balloon mortgage has serious consequences: The home may be foreclosed upon, and t🅰he borrower’s credit 🅘score will suffer a major hit.

Paying Off a Balloon Mortgage

Borrowers generally have three𝄹 options when it co𒀰mes to paying off a balloon mortgage.

Settle It

Borrowers can pay the remaining principal in full. Ideally, borrowers plan through saving and investing with this short-term time frame in mind, or their income ha♏s risen by the end of the loan term.

Refinance It

Borrowers can pay off one mortgage by taking out another loan, commonly a more conventional 澳洲幸运5官方开奖结果体彩网:fixed-rate mortgage that amortizes over its term. This 💞strategy works if borrowers have built up a steady amount of equity 🥃in the home, have a steady income or other assets, and have a good credit history.

Sell the Home

Borrowers can use the proceeds of the sale to pay off the debt. Many people who choose balloon mortgages plan to be in that home for a🦩 few years. House flippers who buy, renovate, and sell residences may opt for balloon mortgages.

What Are the Risks to Lenders With a Balloon Mortgage?

A ballooꦓn mortgage has risks for lenders because the final payment is such a large amount. The odds are greater that the borrower won’t be able to make it and that the lender will have to foreclose on the property. Also, because the monthly payments are lower, lenders don’t benefit from a significant cash stream from the loan.

Why Would Someone Choose a Balloon Mortgage?

People who expect to stay in their home for only a short period may opt for a balloon mortgage. Oth💖ers may intend to stay in their homes and refinanc𒈔e before the balloon payment is due.

How Do Businesses Benefit From a Balloon Mortgage?

The balloon mortgage is used by businesses in the construction industry to obtain short-term financing for construction projects without offering 澳洲幸运5官方开奖结果体彩网:collateral. In this case, they are ಞgenerally short-term loans with higher interest rates than conventional collateralized business loans.

The Bottom Line

A balloon mortgage is a home loan with an initial 💮period of low or interest-only payments. The borrower pays off the balance in full at the end of the term. A balloon mortgage is usually short-term, often five to seven years. Balloon mortgages can be advantageous to buyers planning to be in the home for a short period and are often used for commerci🔯al real estate.

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