Balloon loan (often called a balloon mortgage) is a loan—commonly used in real estate—where the borrower pays smaller monthly payments for a set period and then must make one large lump-sum payment (the “balloon payment”) at the end of the term. Unlike a fully amortized mortgage, a balloon loan does not fully pay down the principal with equal installments over its life.
Balloon loans typically combine a shorter loan term with lower monthly payments and a final large principal payment. Key features include:
Scenario: A buyer expects higher income in a few years or plans to sell before the balloon is due. Example: A 7-year balloon mortgage for $250,000 at 5% interest amortized over 30 years leads to monthly payments of about $1,342. After 7 years the remaining balance (roughly $215,000) is due as a balloon payment. Typical outcome: refinance or sell before maturity to cover the balloon.
Scenario: A business owner uses a 5/25 loan structure—payments calculated as if amortized over 25 years but the full balance due after 5 years. Example: A $1,000,000 loan at 6% produces monthly payments of about $6,320; after 5 years the remaining balance (about $850,000) becomes due. Outcome: Owner plans to refinance or sell the property.
Scenario: An investor takes a short-term (e.g., 3-year) balloon loan to buy and renovate a property. Monthly payments stay low while the investor renovates and markets the property. Outcome: If the property sells for a profit before maturity, sale proceeds pay the balloon and the investor keeps the gain.
Scenario: A buyer takes a balloon auto loan to reduce monthly payments, with a large final payment after a few years. Outcome: The buyer may sell or refinance the car before the balloon is due; if the vehicle depreciates significantly, covering the balloon may be difficult.
Balloon loans can be appropriate if you have a clear exit strategy—such as a planned sale, expected income increase, or reliable refinancing option—within the loan term. They are popular for short-term investments (fix-and-flip), transitional financing, and borrowers who want lower payments temporarily.
