📘 What is a Balloon Mortgage?

A balloon mortgage is a type of home loan that offers low or interest-only payments for a set term, followed by a large “balloon” payment at the end of the loan term. This lump sum often represents the remaining principal balance.

It’s commonly used in short-term financing strategies where the borrower plans to refinance or sell the property before the balloon payment is due.

📌 When and Why It’s Used

Balloon mortgages are often used by investors or homebuyers who expect to own the property for only a short period or who anticipate a future refinance. The lower monthly payments can free up cash flow for other investments or renovation work.

However, this structure can be risky if property values drop or refinancing becomes unavailable, as the borrower must pay off the large balance at maturity.

🧮 How It’s Calculated or Applied

During the term of the balloon mortgage (typically 5 to 7 years), the borrower pays only a portion of the loan—sometimes interest only. At the end of the term, the remaining balance (the balloon) is due in one lump sum.

While there’s no strict formula, the balloon payment is typically the full unpaid principal remaining after the monthly payments.

Borrowers must be prepared to either pay the balloon or refinance when the term ends.

✅ Pros

• Lower monthly payments than traditional mortgages
• Can be ideal for short-term investment strategies
• May allow for greater cash flow early in the loan

⚠️ Cons

• Large lump-sum payment at the end can be financially risky
• Refinancing may not always be available or affordable
• Not ideal for long-term property holders or uncertain markets