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What Is a Balloon Mortgage?

Sarah Edwards

  • Modified 15, November, 2024
  • Created 26, December, 2023
  • 7 min read

A balloon loan can save you money in the early stages of your loan term — but there’s a catch. Once your low-payment term is over, you’ll owe a large, lump-sum final payment. That’s not necessarily a dealbreaker, as long as you plan. Before you buy a home, you might want to consider whether a balloon mortgage is right for you.  

How does a balloon loan work? 

In a balloon mortgage loan, you’ll make small monthly payments for a defined period. After this period is over, your balloon payment is due. This is a large, lump-sum payment, typically the balance of the loan.   

While a traditional mortgage offers terms of up to 30 years, a balloon loan is usually much shorter — roughly five to ten years, though some longer terms may be available. This means that borrowers may enjoy low monthly mortgage payments for the majority of their loan term, only to be faced with a massive balloon payment at its conclusion.  

Balloon mortgages may also have higher interest rates than fixed or adjustable-rate mortgages. Lenders will typically have stricter credit score requirements for applicants, which may make it more challenging to secure a balloon loan compared to other types of real estate financing.  

Calculate a balloon payment 

How do you know how much the balloon payment will be? The answer depends on the way your balloon loan is structured. The following are three types of balloon mortgages, each of which offers its own way of calculating your final payment. 

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Balloon mortgage pros and cons

What are the pros and cons of a balloon mortgage loan? Here are some things to consider before you enter into this type of home loan. 

  • Pros

    Positively, a balloon mortgage offers many distinct advantages:  

    • Low (or no) monthly payments for the duration of your loan  
    • The money you save on monthly payments can be used for other expenses  
    • Lower monthly payments make it easier for first-time homebuyers 

    The primary benefit is that the smaller payments will give you extra cash flow during the loan term. That might buy you time to focus on repaying an auto loan or completing another project — then you can take care of your home loan when the term expires. 

  • Cons

    Despite the financial flexibility of a balloon mortgage, there are some serious drawbacks:  

    • The balloon payment can be tens of thousands of dollars (or more)  
    • Life circumstances or the housing market could change, making your plan to pay off the balloon payment impossible, putting you at risk of foreclosure, and ultimately losing your home 
    • The balloon payment may cause you to seek out another loan to cover it  
    • Balloon mortgages typically require a higher credit score than traditional loans  

    In other words, balloon loans are a trade-off. Sure, you get access to low-to-no payments during your loan term. You just need to have a plan in place to deal with the balloon payment after the loan.  

How to pay off a balloon mortgage

There’s more than one way to handle the balloon payment. Here are some of the most common ways to pay off your balloon mortgage. 

Is a balloon loan right for me?

Are you thinking about buying a home? A balloon loan can be a great loan option if you plan to deal with the remainder of your loan. It’s also a good strategy for house flippers or other real estate investors.    

Otherwise, there are still several loan options out there, including low-cost options for first-time homebuyers. When you’re ready to explore your loan options, a mortgage lender can help you find a plan that’s right for you.  

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