What Is a Mortgage Loan With a Balloon Payment?

how does a balloon loan work

A balloon mortgage has a large, final payment due after a period of five or seven years.

Function

A mortgage with a balloon payment requires monthly mortgage payments for a period of five or seven years, then a balloon payment of the remainder of the mortgage balance. The monthly payments for the period before the balloon is due are usually calculated based on a 30-year amortization schedule. During the monthly payment period, a portion of the principal balance will be paid down, but the balloon payment will be a significant portion of the original loan balance.

Potential

A balloon mortgage is used to achieve a low monthly payment on an investment property for a limited amount of time. The monthly payment with a 30-year amortization will be lower than if the property is financed with a 15 or 20-year mortgage. The interest rate for

the five or seven-year period may be lower than the rate for a 30-year fixed rate mortgage. The goal with a balloon payment mortgage is to obtain a low, fixed monthly payment with the plan of selling the property at a profit before the balloon payment is due.

Considerations

Significance

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