What Is a Balloon Mortgage and How Does It Work?

What Is a Balloon Mortgage?

A balloon mortgage is a type of home loan that requires a large, one-time payment - known as a balloon payment - at the end of the loan term. Unlike traditional mortgages that fully pay down the loan over 15 or 30 years, balloon mortgages leave a significant portion of the principal unpaid until maturity.

Balloon mortgage terms are usually short, often five to seven years. During that time, borrowers make lower monthly payments, which may be interest-only or partially amortized. When the term ends, the remaining balance becomes due in full.

To understand how balloon mortgages compare with other loan options, you can explore our overview of mortgage types and features.

How Does a Balloon Mortgage Work?

Balloon mortgages follow a different structure than fully amortizing loans. While monthly payments may look attractive at first, the loan does not pay itself off by the end of the term.

1. The borrower takes out a mortgage with a short fixed term.
2. Monthly payments are calculated using interest-only or partial amortization.
3. The principal balance decreases slowly - or not at all.
4. At the end of the term, the remaining balance is due as a balloon payment.

You can model how these payments work using a balloon mortgage calculator or compare the payment structure with a traditional loan using our mortgage payment calculator.

Balloon Mortgage Example

Consider a $300,000 balloon mortgage with a 5-year term and a 6.5% interest rate. Instead of paying off the loan over 30 years, the borrower makes payments based on interest only.

• Monthly payment: approximately $1,625
• Principal paid during term: $0
• Balloon payment after 5 years: $300,000

While the monthly payment looks manageable, the borrower must be prepared to refinance, sell the property, or pay the balance in cash when the loan matures.

What Happens When the Balloon Payment Is Due?

When a balloon mortgage reaches the end of its term, the remaining balance must be paid in full. Borrowers typically choose one of three options:

• Refinance into a new mortgage
• Sell the property and use the proceeds to pay off the loan
• Pay the balance in cash

Refinancing is the most common approach, but it depends on credit, income, interest rates, and home value at the time.

Pros and Cons of Balloon Mortgages

Advantages

• Lower monthly payments
• Short-term affordability
• Useful for short ownership horizons

Disadvantages

• Large lump-sum payment risk
• Dependence on future refinancing
• Exposure to market and interest rate changes

Who Are Balloon Mortgages Best For?

Balloon mortgages tend to work best for borrowers with a short-term strategy and a clear exit plan. Common scenarios include real estate investors, house flippers, and buyers who plan to sell or refinance quickly.

For long-term homeowners or first-time buyers, traditional mortgages usually offer more predictability and less risk.

Balloon Mortgage vs Traditional Mortgage

Traditional mortgages fully amortize over the loan term, meaning the balance reaches zero by the final payment. Balloon mortgages leave a significant balance unpaid.

Compare a balloon mortgage to a 30-year fixed mortgage or an interest-only mortgage to see how long-term costs differ.

Can You Refinance a Balloon Mortgage?

Refinancing a balloon mortgage is common, but never guaranteed. Approval depends on your credit profile, income, home equity, and prevailing interest rates.

You can estimate refinancing scenarios using our refinance calculator or evaluate costs with the refinance break-even calculator.