How balloon mortgages work
A “30-due-in-7” balloon mortgage is amortized over 30 years, so the monthly payment matches a 30-year fixed loan, but the balance is due after 7 years. Names like 5/25 or 7/23 describe two-step loans that, instead of ballooning, reset to a new rate for the remaining years. Read the note carefully: a true balloon requires the balance to be paid, while a two-step loan only changes the rate.
Example
A $350,000 balloon mortgage at 6.75%, 30-year amortization, due in 7 years: the payment is $2,270.09 a month and $317,756 is due at year 7, which is 90.8% of the original loan.
Balloon mortgages today
Since the federal Ability-to-Repay and Qualified Mortgage rules took effect in 2014, balloon mortgages on owner-occupied homes have been uncommon and mostly limited to small rural lenders and private or seller financing. They remain common on investment property (rentals held in an LLC, for example), mixed-use and commercial real estate, and in seller-financed sales. If you have a balloon coming due on a rental or investment property, a DSCR loan qualifies on the property’s rent instead of your income and can pay off the balloon.