Balloon payment

Balloon loans keep payments low by sizing them as if the loan ran for decades, then requiring the leftover balance to be paid off much sooner. The borrower must sell, refinance or pay cash when the balloon comes due.

Worked example. A $300,000 loan at an illustrative 7% is amortized over 30 years, so the monthly payment is about $1,996, but the term is seven years. After 84 payments, the balance still owed is about $274,000. That entire amount is the balloon due at the end of year seven. Over those seven years, the borrower paid roughly $167,700 in total, most of it interest.

Balloon structures are common in commercial and investor lending, in some seller-financing arrangements and in certain construction or bridge loans. They are uncommon in today's consumer residential mortgages, and qualified mortgage rules generally exclude balloon features except in narrow cases. The core risk is refinance risk: if rates rise, values fall or the borrower's income drops, a new loan might not be available on acceptable terms when the balloon is due. The balloon mortgage calculator shows the payment and the balance owed on the due date.