Against paying it off properly
A balloon loan keeps the payments small by not repaying most of the money. The payment is worked out over a long schedule, but the loan ends early, and whatever is left falls due in one lump.
What counts as a balloon
The CFPB describes it as a large, one-time payment at the end of the loan term. The regulations are more precise: a balloon payment is one that is more than twice a regular periodic payment. If your final payment is five or ten times the normal one, as the calculator above usually shows, you have a balloon whatever the paperwork calls it.
Where they are allowed
Balloon payments are generally not permitted on qualified mortgages, with a narrow exception for small lenders operating in rural or underserved areas, where the loan must run at least five years, carry a fixed rate and be amortized over no more than 30 years. Commercial property loans, land loans and hard money loans are outside those rules and commonly use balloons.
If a mortgage does have one, the Loan Estimate has to say so, and give the maximum amount of the balloon and its due date. Check that box before anything else.
The only question that matters
How will the balloon be paid? There are three honest answers: sell the asset, refinance, or have the cash. Refinancing assumes you will qualify at the time, at rates nobody can promise, on a property whose value nobody can promise either. That is the risk in the structure, and it is why balloon loans are cheap per month.
Quick answers
What is a balloon payment?
A single large payment at the end of a loan, left over because the monthly payments were worked out over a longer schedule than the loan actually runs. Formally, it is a payment more than twice a regular one.
How do I calculate a balloon payment?
Work out the payment over the long amortization period, then run the balance forward to the balloon date. The calculator above does both and shows the interest paid in between.
Are balloon mortgages legal?
They are generally not allowed on qualified mortgages, except for small lenders in rural or underserved areas. They remain common on commercial, land and hard money loans.
What happens if I cannot pay the balloon?
You refinance, sell, or default. Refinancing depends on rates, your credit and the property's value at the time, none of which can be promised in advance.
Sources
- CFPB, what a balloon payment is and when it is allowed
- 12 CFR § 1026.43(e) and (f), qualified mortgages and the small-creditor balloon exception
- 12 CFR § 1026.37(b), balloon disclosure on the Loan Estimate