Balloon payment
The final payment on a mortgage loan that is much more than the minimum monthly installments because the loan was not completely amortized.
A typical balloon mortgage might have a 5-7 year term with monthly payments calculated as if the loan would be paid off over 30 years. When the shorter term ends, the remaining principal balance becomes due as the balloon payment.
Balloon payment structures are typically used by borrowers who don’t plan to keep the property for the long term, expect their income to increase significantly, or anticipate refinancing before the balloon payment is due.
Advantages of balloon payment mortgages
- Lower monthly payments compared to conventional mortgages
- Potentially lower interest rates
- Useful for borrowers expecting a significant future cash influx
- Can be appropriate for investment properties with planned short-term ownership
Disadvantages and risks
- Substantial financial burden when the balloon payment comes due
- Refinancing risks if property values decline or interest rates increase
- Qualification difficulties if the borrower’s financial situation deteriorates
- Potential for foreclosure if unable to make the balloon payment