What Is a Balloon Mortgage?

Written by Steven PorrelloSeptember 14th, 20225 minute read

How it works | Compare balloon vs. conventional | Pros and cons | Alternatives| Pay off your balloon mortgage | Summary | FAQ

A balloon mortgage is a home loan that initially has lower monthly payments than most 15- and 30-year mortgages. But there’s a catch: after a short period, usually 7 years, you have to repay the entire mortgage balance with a lump sum payment — the balloon payment.

Balloon mortgages are popular with buyers who don’t expect to live in their homes long and want to take advantage of lower interest rates. But they can be risky, as they end with a large balloon payment that can be hundreds of thousands of dollars.

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How do balloon mortgages work?

Generally, balloon mortgages are structured to let borrowers pay a reduced amount for a short period — usually 5, 7, or 10 years. When that term ends, you’ll pay a lump sum.

Balloon mortgages come in three main types:

  • Balloon payment: You pay principal and interest for 5–10 years, then you pay the remaining balance.
  • Interest-only: You pay only interest, then you pay the entire loan balance.
  • No payment: You’ll pay nothing for the life of your loan, but you will accrue interest. At the end of your term, you’ll pay the interest you’ve accrued, plus the loan amount.

Do you pay...
Principal?
Interest?
End-of-term lump sum?
Balloon payment


Full remaining balance
Interest-only


Principal
No-payment


Principal + interest accrued

Balloon payment vs. conventional mortgage

Most lenders structure balloon mortgage payments as if you were getting a 15- or 30-year conventional loan. That means your fixed monthly payments will be the same price as if you were paying it over 15 or 30 years until your loan term ends. Then you’ll make the balloon payment to close out the mortgage.

Let’s say you want to borrow $315,000 to buy a house, and you’re deciding between a 30-year conventional loan and a seven-year balloon mortgage with a 30-year amortization schedule (the way your payoff is "stretched" over 30 years).

If nothing changes, here's how your payments will break down:

30-year conventional mortgage
7-year balloon mortgage

6.7% interest rate

5% interest rate

$2,644 per month × 360 months = $951,840

$1,690 per month × 84 months = $141,960

$278,717 lump sum after 7 years

Total: $951,840
Total: $420,677

So you'll pay less overall with a balloon payment, but if you can't come up with the cash for the lump sum, you might be in trouble.

Are balloon mortgages a good idea?

A balloon mortgage makes the most sense for borrowers who:

🚗 Expect to move before the balloon payment is due. Lower monthly payments help you save money on housing — but your home sale would need to cover the balloon payment.

💸 Expect a significant cash influx. You could use extra income to cover the balloon payment or afford payments on a conventional loan.

🛠 Want to flip properties. As long as you can sell the house for more than the balloon payment, you can make a profit.

Low or no monthly payments. You’ll pay less per month than with conventional mortgages.

Buy a house sooner. The lower monthly payments allow you to afford a home purchase now — ideal if you’re expecting a significant increase in income.

Low interest rates. Lenders may offer a lower interest rate for the life of a balloon mortgage.

Risk of foreclosure. If you don’t make the balloon payment, you could lose your home.

Takes longer to build equity. Not paying down your principal could make it hard to refinance your balloon mortgage later, as many lenders require a minimum amount of equity.

Hard to find. Many lenders haven't offered balloon mortgages since the 2008–09 housing market crash.

Conventional mortgage

A conventional mortgage has a fixed monthly payment that you pay for 15 or 30 years. It may have higher interest rates than balloon mortgages, but you'd have more predictability and you won’t pay a balloon payment.

Adjustable-rate mortgage (ARM)

An ARM is a home loan with a variable interest rate. It typically starts with a low introductory rate for a certain period (usually three to 10 years), the introductory period ends and the rate will start to fluctuate according to market conditions.

ARMs have low introductory rates like balloon mortgages, but you won’t have to pay a balloon payment to close out the loan.

Hybrid mortgage

A hybrid mortgage combines elements from conventional mortgages and ARMs. It has an introductory period of fixed interest (usually longer than that of an ARM). After that, your interest rate adjusts periodically.

How do I pay off the balloon mortgage?

If you can’t afford the balloon payment at the end of your term, you do have options for paying it off:

Reset your balloon mortgage

Some lenders allow you to "reset" your balloon mortgage at the end of your term. They’ll give you a new interest rate and calculate a new payment schedule. You’ll pay this new mortgage until the balloon payment is due again.

Sell your home

You can sell your home before your balloon payment is due, then use the proceeds to pay the loan in full.

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Refinance

If you don’t want to sell, you can pay your balloon payment with another home loan. You could refinance your balloon mortgage into a 15- or 30-conventional mortgage, which will extend your payments.

Summary

  • Balloon mortgages are home loans with low monthly payments that end with one large lump sum payment (the balloon payment).
  • Balloon mortgages are great if you plan to move in a short period of time, or if you expect an influx of cash in the near future.
  • The balloon payment is often hundreds of thousands of dollars. If you can’t pay that when it's due, you risk foreclosure.
  • You can pay the balloon payment by resetting the mortgage, selling the house, or refinancing into another home loan.

FAQ about balloon mortgages

When the balloon payment is due, you’ll pay whatever is left on your home loan, plus interest and fees. You can pay this by selling your house or using your own personal funds. You can also refinance your balloon mortgage into another home loan, such as a 15- or 30-year conventional mortgage.

A 30/15 balloon mortgage has a mortgage term of 15 years, but your monthly payments are the same amount as for a 30-year conventional mortgage. After 15 years, you’ll pay the rest of your loan (plus interest and fees) as a lump sum.

A 30/15 balloon mortgage is not the same as a 15-year conventional mortgage. With a 15-year conventional mortgage, your loan is evenly split into monthly payments across 15 years. With a 30 due in 15 mortgage, your loan is split as if it was a 30-year loan. You'll make lower monthly payments for those 15 years, after which you’ll make one large balloon payment to cover the remainder of your loan.

You can make extra payments on a conventional mortgage to pay it off faster. Just be careful: some lenders charge prepayment penalties.

Interest rates are typically lower on 15-year mortgages. Learn more about interest.