Rates & interest

Balloon payment

A large lump-sum payment due at the end of a loan that was structured with low payments over a short term, leaving most of the principal unpaid.

Sources

What does balloon payment mean?

A balloon loan keeps monthly payments low by amortizing over a long schedule — say 30 years — while the full remaining balance falls due after a short term such as five or seven years. That single lump sum, the balloon, dwarfs any regular payment. Borrowers typically plan to refinance, sell, or pay it off before it lands, so a balloon is really a bet on future cash or credit.

A balloon in numbers

Take a $250,000 loan at 7%, amortized over 30 years but due in full after seven. The monthly payment is about $1,663 — the same as a 30-year loan — yet after 84 payments about $227,900 is still owed, and the whole amount falls due at once. Seven years of payments retire only about $22,000 of principal.

Where balloons show up today

Federal qualified-mortgage rules generally keep balloon features out of standard home loans, with narrow exceptions for some small lenders in rural areas. You are most likely to meet a balloon in commercial loans, some non-QM and investor loans, and seller-financed deals. Before signing, make sure the exit — a sale or a refinance — would still work if rates are higher or values lower when the balloon comes due.

Frequently asked

How is a balloon payment calculated?

The loan is amortized over a long schedule — often 30 years — so payments stay low, but the term ends early, say in five or seven years.

The balloon is whatever principal is still owed at that point, which on a 30-year amortization is most of the original balance.

What happens if you cannot make the balloon payment?

You generally must refinance into a new loan, sell the property, or risk default and foreclosure.

Because the lump sum is so large, borrowers plan the exit in advance — and counting on being able to refinance later is the main risk of a balloon loan.