Balloon Mortgage
A mortgage with low initial payments that ends with a large lump-sum payment of the remaining balance.
What is Balloon Mortgage?
A balloon mortgage is a type of home loan that features relatively low monthly payments for a fixed initial period — typically 5 to 7 years — but requires the borrower to pay off the entire remaining loan balance in one large lump-sum "balloon" payment at the end of that term. The monthly payments are usually calculated as if the loan were a 30-year fixed mortgage, but the full principal becomes due much sooner. Balloon mortgages appeal to borrowers who expect to sell or refinance before the balloon date, or those who anticipate higher future income. They carry significant risk if the borrower cannot sell, refinance, or make the balloon payment when due.
Example
A borrower takes a 7-year balloon mortgage on a $400,000 home at 5.5%. Monthly payments are calculated on a 30-year amortization schedule — approximately $2,271 per month — but after 7 years the remaining principal balance of roughly $370,000 becomes due in full. If home values have fallen and the borrower cannot refinance, they face potential default.
Source: Consumer Financial Protection Bureau — Balloon Mortgages