Balloon Mortgage Loan Overview
Balloon loans aren't as popular as they once were, but they're still around. They're an alternative to adjustable rate mortgages (ARMs) for people who are looking to get the lowest interest rate they can.
A balloon mortgage is a short-term loan where you make regular mortgage payments for a few years, then pay off the rest in one lump sum. This last payment is called a "balloon," because it swells enormously compared to the monthly payments you had been making.
Since few borrowers can afford to cover the entire balloon payment out of their available funds, they usually either refinance the loan or sell the property when the payment comes due. So that needs to be part of the plan going in.
Because balloon mortgages are short-term loans, lenders can offer lower rates than they do on long-term loans, such as a 30-year mortgage. That's because the pricing on a 30-year loan has to take into account the possibility that interest rates may rise significantly over the next three decades.
Most balloon mortgages run five to seven years. The monthly payments are typically based on a 30-year amortization schedule; that is, the payments are the same as they would be for a 30-year loan with the same interest rate, except for the balloon payment at the end.
Who would benefit from a balloon mortgage?
Balloon loans aren't for everyone, but they can be a real plus for people in certain situations.
- Buyers who plan to sell the home in a few years, so they don't need a 30-year mortgage to begin with.
- Borrowers who expect mortgage rates to hold steady or decline over the comings years, so they will benefit from refinancing
- Homebuyers who can't afford a large down payment and are looking to build some equity before refinancing
- Buyers who are looking to maximize what they can borrow by keeping their monthly payments as low as possible.
- A buyer with an irregular but substantial income who expects to pay the loan off quickly, but wants the flexibility to make minimal payments when funds are tight.
Using the Balloon Loan Calculator
The Balloon Loan Calculator assumes an amortization period of 30 years – that is, the monthly payments are based on a 30-year payment schedule without a balloon.
Start by entering the following information in the appropriate boxes:
- The loan amount
- The loan term (number of years before the balloon payment comes due)
- The interest/mortgage rate
The calculator will figure out:
- Your monthly payments
- The amount of your balloon payment at the end of the loan
- The total payments you'll make before the balloon
- The total mortgage interest you'll pay
If you'd like to see how much you could reduce your balloon by making additional payments during the course of the loan, click on the plus to expand the "prepayments" section. Then enter how often you wish to make additional payments, the amount of those payments and when you wish to begin making them. The calculator will then give you a revised figure for your balloon payment based on those numbers.
Clicking on "View report" will give you a summary of the loan and a month-by-month breakdown of how fast you'll pay down the loan and how much of each payment will go toward principle and interest.
Wondering what kind of mortgage rate you could get on a home loan? Use the "Get Free Quote" button at the top of the page.