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Balloon Mortgage: Definition, Who It’s For, Pros and Cons

A balloon mortgage gives you low payments for a while, but then you have to pay it off in a lump sum.

Robin Rothstein
Chris Jennings
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A balloon mortgage is a home loan with low monthly payments for a few years, after which you must pay the remaining balance in a lump sum. You get a lower interest rate than with longer-term fixed-rate mortgages, in exchange for having to pay off the outstanding loan principal after a set period, often between five and 10 years.
Balloon loans are rare because of their high-risk nature. Notably, if the borrower can’t make the lump-sum balloon payment when the term ends, the lender could ultimately foreclose on the home.

How a balloon mortgage works

Balloon mortgages feature relatively low monthly payments despite their short terms because the lender creates an amortization schedule as if the loan was a 30-year mortgage. As a result, monthly payments are small.
But there’s a trade off. When the term ends, you’ll only have repaid a small portion of what you borrowed. To settle the balance, you’ll need to pay the remaining amount in one giant lump sum — the balloon payment.

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Balloon mortgage example

Here’s a five-year balloon mortgage scenario showing how much you might need to repay at the end of the loan.
Scenario
Value
Purchase price
$500,000
Loan amount (20% down)
$400,000
Interest rate
5%
Monthly commitment
Amortization period
30 years
Monthly payment
$2,147
Five-year period
Total paid over 5 years
$128,837
Total interest paid over 5 years
$92,982.37
Final balloon payment
$367,314

Types of balloon mortgages

While the term “balloon mortgage” may sound like a single loan type, you might encounter three variations:
  • Interest and principal: This standard option requires both interest and principal payments, though early payments are typically weighted toward interest. The remaining loan balance comes due when the mortgage term expires.
  • Interest-only: You pay only the loan interest during the loan period, resulting in lower monthly payments. The full principal amount must be repaid when the balloon payment comes due at the end of the loan term.
  • No payments: This option is the riskiest of the bunch. You make no payments during the loan term — but interest still accrues. You must repay the entire principal plus accumulated interest when the loan term ends.

Who should consider a balloon mortgage?

A balloon mortgage may be suitable if:
  • You're certain that you will sell the property before the balloon payment comes due.
  • You're sure that you'll receive a lump sum at least equal to the balloon payment before it comes due. That could be something like a bonus or series of annual bonuses, an inheritance or the sale of another property.
  • You'll refinance the mortgage before the end of the term.
» MORE: Review how mortgage rates are trending

Balloon mortgage pros and cons

Pro

  • You’ll probably get a lower interest rate than with a typical fixed-rate loan — and that means a lower monthly payment.
  • As these are usually short-term loans, you’ll pay less overall interest compared to longer-term mortgages.
  • You can typically make additional payments toward principal without incurring a prepayment penalty.

Cons

  • Despite your plans, you might not be able to sell or refinance.
  • Interest rates might be higher when you need to refinance before the balloon payment is due, leaving you with higher-than-expected monthly payments.
  • Your expected financial windfall might not arrive.
  • If you can’t make the balloon payment, the lender can foreclose on the house.

How to handle the final balloon payment

Paying off the balloon payment when the loan expires is one option — but balloon mortgage borrowers have other paths to consider:
  • Build a payoff fund: Make regular deposits into a high-yield savings account or money market account so you’re prepared when the balloon payment comes due. 
  • Refinance the loan: Rather than pay the huge lump sum at the end of the term, refinancing to a traditional mortgage could be an option if you meet lender standards. If you’re considering this option, begin preparing your refinance plan at least six months before your term ends. You’ll want to give yourself ample time to gather financial paperwork and shop multiple lenders for competitive rates.
  • Talk to your lender: If your lender allows, you may be able to reset your interest rate to the current market rate and extend your mortgage due date based on lender conditions.
  • Sell the property: If you can’t make the balloon payment and don’t want to refinance or extend the loan, you could sell your property and use the funds from the sale to cover the remaining loan balance.

A balloon mortgage could be hard to find

Balloon mortgages were a thing back in the Wild West days of home loans, just before the housing crash of 2007-08. Today, they can be harder to find. Balloon loans might be available from small lenders.
An adjustable-rate mortgage offers a better solution for most short- to mid-term borrowers because ARMs have rate caps that limit how high the interest rate can rise. Even better: There’s no ticking time bomb of a looming balloon payment.

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