What is a balloon loan?
A balloon loan has regular monthly payments that don’t pay off the full balance by the end of the term. The remaining principal is due in one large payment, the balloon, on the maturity date. Payments are usually calculated as if the loan ran for 15, 25 or 30 years (the amortization period), but the loan actually ends after a much shorter term, often 3, 5, 7 or 10 years. Some balloon loans are interest-only, in which case the balloon is the entire original amount.
The result is a lower monthly payment than a loan fully paid off over the same term, in exchange for a large bill at the end.
How the balloon is calculated
First the monthly payment is calculated on the amortization schedule:
L = loan amount · r = annual rate ÷ 12 · n = amortization in months
The balloon is the balance still owed after the last regular payment:
k = number of payments made before the balloon is due
With an interest-only period at the start, the balance doesn’t fall at all during those months, so the balloon is larger. The calculator handles both.
Worked example
A $400,000 loan at 7% with payments on a 30-year schedule and a balloon after 7 years:
- Monthly payment: $2,661.21, the same as a 30-year loan
- Paid over 84 months: $223,542, including $188,131 of interest
- Principal paid off: only $35,410
- Balloon due in year 7: $364,590, or 91.1% of what was borrowed
That is the catch with balloon loans: on a long amortization, very little principal is paid in the early years, so most of the loan is still owed when the balloon hits.
Balloon by term: quick reference
Balloon owed on a $1,000,000 loan at 7%:
| Balloon due after | 25-yr amortization | 30-yr amortization |
|---|---|---|
| 5 years | $911,622 (91.2%) | $941,316 (94.1%) |
| 7 years | $866,680 (86.7%) | $911,474 (91.1%) |
| 10 years | $786,334 (78.6%) | $858,124 (85.8%) |
Monthly payment: $7,067.79 on 25-year amortization, $6,653.02 on 30-year.
Where balloon loans are used
- Commercial real estate. Almost every commercial mortgage is a balloon loan: typically a 5, 7 or 10-year term on a 20 to 30-year amortization. See the commercial balloon loan calculator.
- Bridge, fix-and-flip and construction loans. Short-term and usually interest-only, so the full amount is due at the end. See the interest-only balloon calculator.
- Seller financing. Sellers often carry a note with a 3 to 5-year balloon so they get paid out once the buyer can refinance. See the seller financing calculator.
- Some residential and auto loans. Less common since 2014 rules limited balloons on most home loans, but they still exist in non-qualified and private lending, and some auto and equipment financing.
Options when the balloon comes due
There are really only four: refinance into a new loan, sell the property, pay it from cash, or negotiate an extension with the lender. Refinancing is by far the most common. The balloon payment coming due guide walks through the timeline and what lenders will look at. If you already have a balloon loan, the remaining balance calculator shows exactly how much you will owe and when.