Balloon Mortgage
A balloon mortgage has lower monthly payments for a set period, then requires a large lump-sum 'balloon' payment of the remaining balance at the end of that term — typically 5 or 7 years. They are uncommon for primary home purchases today but appear in commercial real estate and some owner-financed deals.
On a 7-year balloon mortgage for $300,000 at 6.5%, you might make payments calculated on a 30-year schedule — but at the end of year 7, the full remaining balance (roughly $276,000) comes due all at once. Most borrowers plan to either sell the home or refinance before the balloon payment hits.
The risk is clear: if property values drop or your credit deteriorates before the balloon date, you may not be able to refinance. If you can't pay the balloon, you face foreclosure. For this reason, traditional balloon mortgages disappeared from the consumer mortgage market after the 2008 financial crisis, and most lenders require refinancing into a fully amortizing loan.
Balloon mortgages still appear in short-term commercial lending, hard money loans, and some seller-financed transactions. If you encounter one, have a clear exit strategy and understand exactly when the balloon payment is due.
Key Takeaway
A balloon mortgage has lower monthly payments for a set period, then requires a large lump-sum 'balloon' payment of the remaining balance at the end of that term — typically 5 or 7 years. They are uncommon for primary home purchases today but appear in commercial real estate and some owner-financed deals.
Related Terms
Frequently Asked Questions
If you can't refinance, sell, or pay the lump sum, you risk defaulting on the loan and potentially losing the home to foreclosure.
They are rare for home purchases. They still exist in commercial lending and some private seller-financed deals, but most consumer lenders have moved away from them.
Lower initial payments can be attractive for short-term holds or investment properties where the owner plans to sell before the balloon comes due.
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