A balloon payment is a larger-than-usual one-time payment at the end of a loan term. It is called a balloon payment because of its large size. Balloon payments are common for certain types of debt, including mortgages and bonds. A balloon payment mortgage is a mortgage that does not fully amortize over the term of the note, thus leaving a balance due at maturity. Balloon loans offer relatively low payments throughout the life of the loan until the final payment comes due. The final payment is substantially higher than the previous payments and is the entire principal balance due. Balloon payments are more common in commercial real estate than in residential real estate today due to the prevalence of mortgages with longer periods of amortization, in particular, the 30-year fixed-rate mortgages.
If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could owe a big amount at the end of the loan. Generally, a balloon payment is more than two times the loan’s average monthly payment, and often it can be tens of thousands of dollars. Most balloon loans require one large payment that pays off your remaining balance at the end of the loan term. If a borrower can’t make a balloon payment, they may need to refinance their loan or sell the asset purchased with the loan money.
A balloon payment isn’t allowed in a type of loan called a Qualified Mortgage, with some limited exceptions. Balloon loans can be an alternative to traditional loans for things like homes, cars, and businesses. However, they may have higher interest rates than traditional loans. If you’re considering a balloon loan, you need to think about whether and how you can make the balloon payment when it comes due.
