What is a Balloon Home Loan?

Balloon Home Loans Explained

young couple making calculations

A balloon loan is a type of mortgage that doesn’t fully amortize over the life of the loan, leaving a large “balloon payment” due at the end of the mortgage. Home loans with balloon payments have lower monthly payments in the years leading up when the balloon payment is due, but the size of many of these payments often makes it difficult (or impossible) for borrowers to pay them off. For example, many balloon loans have a term of 5 to 7 years (after which the balloon payment is due), while the regular, monthly mortgage payments are based off a 30-year loan term.

What are the uses for a balloon loan?

In many cases, people who take out a mortgage with a balloon payment do not actually intend to pay it off when the time comes. Instead, they’ll often take on the mortgage with the intention of selling the property a for-profit if the price goes up, or simply refinancing their mortgage into a non-balloon home loan before the big payment is due. Or, in other cases, they simply covert the balloon loan into a conventional 15 or 30-year mortgage. This can make a balloon loan a great way to buy a larger home than you could usually qualify for, and potentially make money off from selling it later (if you can time the market right.)

What are the benefits and risks of a balloon loan?

Much of the time, balloon mortgages are easier to qualify for than traditional mortgages, and may also have lower interest rates. Despite that, a balloon loan can be a risky proposition, especially if a borrower doesn’t have the funds to cover the balloon payment when it’s due. And, while many people do plan to refinance their loan before the balloon payment is due, there’s no specific guarantee that a lender will approve your refinance. If you can’t pay, and you can’t refinance, then you could end up defaulting on your loan (and no one wants that!)

How Large can a Balloon Payment Be?

The size of a balloon payment can vary greatly depending on the terms of your specific loan. Typically, a balloon payment is at least two times the average monthly payment and can range upward into the tens of thousands of dollars (or even more!)