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Balloon mortgages charge lower monthly payments during an introductory period. When this intro period ends, the loan’s remaining balance comes due — all at one time.
When it comes due, the loan’s balance is big. This big payment is called the balloon payment, and it gives balloon mortgages their name.
Believe it or not, this was a common way to finance a home in the 19th and early 20th centuries before the Great Depression upended the financial system, leading to more stable loans like the 30-year fixed.
But balloon mortgages still exist, and some buyers still use them.
How do balloon mortgages work?
Compared to most mortgages, balloon mortgages ask less of borrowers at first. Depending on the loan’s structure, the borrower’s initial monthly payments on the loan might be:
- Interest only
- Mostly interest & some principal
- Nothing — some balloon loans require no payments at all
Say you took out a $250,000 balloon mortgage at 7 percent interest and owed only interest payments for five years:
| $250,000 loan at 7 percent APR | 5-year balloon loan interest only | 30-year fixed mortgage |
| Monthly Payments 1-60 (five years) | $1,458 each | $1,663 each |
| Balance after five years | $250,000 | $235,330 |
| Payment 61 | $250,000 (balloon payment) | $1,663 |
| Payments 62-360 | N/A | $1,663 each |
*Monthly payments listed here do not include taxes or insurance.
The balloon mortgage’s interest-only payments, during the first five years, would save $12,300 compared to the payments due on the 30-year fixed.
But then, once the five-year intro period ended, the entire $250,000 would come due on the balloon loan. In contrast, the 30-year fixed mortgage continues charging the same $1,663 principal and interest payment for 25 more years or until the loan is paid off.
What about balloon mortgages with no monthly payments?
In the example above, the borrower made interest-only payments, keeping the principal balance the same. Some lenders offer no-payment balloon mortgages:
| $250,000 loan at 7 percent APR | 5-year balloon loan payments | 30-year fixed mortgage |
| Monthly Payments 1-60 (five years) | $0 each | $1,663 each |
| Balance after five years | $337,480 | $235,330 |
| Payment 61 | $337,480 (balloon payment) | $1,663 |
| Payments 62-360 | N/A | $1,663 each |
*Monthly payments do not include taxes or insurance.
Since the borrower made no payments in this example, the interest grew for five years, adding to the loan’s principal balance — and to the amount of the balloon payment.
Pros and Cons of Balloon Mortgages
Balloon mortgages are appealing for their initial monthly payments, but they come with more risks than other mortgages. This makes them harder to find than your average home loan, on top of the other risks we list below.
| Balloon Mortgage Pros | Balloon Mortgage Cons |
| Faster approval | Bigger down payment |
| More flexible underwriting | Higher interest rate |
| Temporary savings from lower payments | The balloon payment itself |
| A way to leverage a more valuable property | Lack of consumer protections |
Where do you get a balloon mortgage?
Balloon mortgages are non-QM loans. Non-QM stands for non-qualifying mortgage. This means non-QM loans are not regulated by the Consumer Financial Protection Bureau (CFPB).
Another way to think about this: Balloon loans aren’t in stock on the shelf at your local bank or credit union alongside 15- and 30-year fixed loans. Instead, you’d need to shop with non-QM loan specialists. Many of these operate as online-only lenders. Some specialists have brick-and-mortar offices.
Since they’re not CFPB-approved, it’s up to the buyer to stay safe. Borrowers should always read and understand all the details of a non-QM loan before signing the papers. Get an attorney or a financial advisor to answer questions about the documents.
Balloon Mortgage Down Payments and Interest Rates
Non-QM lenders face more individual risk because their loans aren’t insured by the federal government or bought by investors after they close. If the loan went bad, the lender could lose a lot of money.
To compensate for this risk, lenders typically charge higher interest rates and require bigger down payments on balloon mortgages. Those 19th-century balloon loans charged 50 percent down. Today’s balloon mortgages require at least 20 percent down.
Non-QM loans also offer a few advantages: Since they don’t have to conform to government or investor rules, lenders have more freedom to accommodate unconventional borrowers — someone with a lower credit score or non-traditional income.
Also, non-QM lenders can close loans faster and with less red tape.
» MORE: See today’s refinance rates
Why would someone choose a balloon mortgage?
So, balloon mortgages can save money at first. But can that justify the huge balloon payment looming the entire time?
For most homebuyers, the answer should be: No, of course not. It’s best to stick with the 30-year fixed mortgage which has made home buying possible for tens of millions of Americans since its creation in 1934.
But for some people, a balloon mortgage could still be useful. These people include:
- Landlords: Since many landlords own multiple homes, they could sell or mortgage one home to pay off a different home’s balloon mortgage if they needed to
- House flippers: Saving money month to month on loan payments can help some fixer-flippers turn a better profit, and they’ll sell the home long before the balloon payment comes due
- Real estate developers: Businesses that develop property may want to spread out acquisition costs without using traditional financing. Balloon loans can help
- Frequent movers: Someone who moves every few years — and already knows they’ll sell the home soon — may want to save some cash with a balloon mortgage’s initial low payments. Or, this buyer could use the lower payments to afford a more valuable home
- People with fluctuating finances: Someone who’s starting a new, lucrative career and expects a huge income increase — or someone who expects to gain a significant inheritance — could use a balloon mortgage to their advantage
In all the examples above, the buyer expects to be rid of the balloon mortgage before its balloon payment comes due — or they expect their changing finances to transform their buying power before the balloon payment comes due.
Until then, they want to benefit from the lower payments. They see the balloon mortgage as temporary from Day 1.
To put it another way: Balloon loans can work for buyers who value immediate cash flow more than they value long-term stability and simplicity.
What if I can’t afford my balloon payment?
Let’s say you got a balloon loan because you knew, for sure, you’d be selling the home long before its balloon payment came due. But now plans have changed. You’d like to keep the home.
Unfortunately, there’s no way you can afford the balloon payment. What can you do?
The best solution for many borrowers is to refinance. Refinancing recasts the balloon payment into the traditional mortgage loan of your choice — a 30- or 15-year fixed, for example.
Plan to Refinance Ahead of Time
Refinancing isn’t always a slam dunk. If you’re a residential home buyer who’s considering a balloon loan to save some money for a while, start planning for the refinance right away.
Do that by:
- Paying more each month: Pay money onto the balloon loan’s principal, even though it may not be required. This will build more equity, making a refinance easier
- Putting as much down as possible: A larger down payment also helps ensure you’ll have the equity for a refinance later
- Buying in a hotter area: When a property appreciates in value, the property owner earns equity. Nobody knows, for sure, how a local real estate market will perform over the next few years, but it’s best to avoid depressed areas that tend to appreciate slowly or may even lose value
Having more equity when it’s time to refinance should make refinancing easier and cheaper.
Balloon Mortgage Alternatives
If a balloon mortgage is too risky but you’d like to explore other alternatives to the standard 30-year fixed-rate loan, consider an adjustable-rate mortgage, or ARM.
These loans resemble a balloon mortgage without the huge payment looming. Instead, when the balloon payment rolls around, the remaining balance automatically gets refinanced at a new interest rate.
With a 7/1 ARM, for example, the loan charges level payments for seven years. Then the remaining balance gets refinanced at a new interest rate each year until the loan balance reaches $0. The loan’s new interest rate could be higher — which would increase payments for that year — or it could go down. The new rate depends on market conditions at that time.
The CFPB regulates how high today’s ARM loan rates can climb from year to year, and it caps the rate’s increase over the life of the loan. So they’re less risky than the ARMs homebuyers used in the early 2000s.
One big advantage of an ARM right now is their average mortgage rate is less than the average on a 30-year fixed.
» MORE: Getting ready to buy or refinance a home? We’ll find you a highly rated lender in just a few minutes
Should you get a balloon mortgage?
Before getting a balloon mortgage, have these two things:
- a need for the loan’s immediate month-to-month savings
- a plan for dealing with the balloon payment
Borrowers who have a plan for the loan’s initial savings and a plan for exiting the loan use balloon mortgages as a nuanced tool — rather than as a tool that could backfire and cost a lot more.
For many borrowers, the exit plan includes a refinance. See today’s refinance rates here.