A balloon mortgage is a type of loan that requires low or no monthly payments and requires a lump-sum payment at the end of the loan term. It differs from fully amortized loans where equal installments of the total balance are repaid over a period of time, and with a balloon mortgage, the remaining balance is paid in full all at once.
Balloon mortgages, however, typically have lower monthly payments. If you’re trying to determine what you can afford, you can use our balloon mortgage calculator below to help determine what your monthly payments will be, your final balloon payment amount, and the total of all interest changes that you will have paid.
If you’re looking for a balloon mortgage, consider checking out RCN Capital, a lender that offers a wide variety of real estate loans with favorable rates and terms. It offers interest-only repayment options and can help you with your real estate investment goals.
Balloon Mortgage Calculator Inputs
The balloon payment calculator we’ve provided will tell you what your monthly payments will be based on certain figures such as the interest rate, your down payment, and the purchase price of a property. Below is a brief description of each of these inputs.
Home Price
If you are purchasing a property, this figure will be the agreed-upon purchase amount. To verify the correct amount, we recommend looking at a copy of your fully executed purchase agreement. Be sure that you are reviewing the most recent copy along with any applicable addendums or counteroffers.
You can also confirm the correct amount by reviewing a copy of the appraisal report or your closing statement. However, these figures may not always be correct. Closing statements prepared by an escrow company, for instance, may not verify the accuracy of the most recent figures until the final stages of closing. Similarly, a property’s appraised value may not always be the same as the agreed-upon purchase price.
Down Payment
The down payment is the amount of funds you personally will be contributing towards the purchase of the property. Depending on the type of loan you get, you could be required to make a minimum down payment anywhere from 0% to 25% or more of the property’s purchase price. In most cases, the difference between your home’s purchase price and the down payment will be equal to the loan amount you’ll need to pay for the remainder of the property.
For instance, a home with a purchase price of $500,000 and a down payment of 10% would equate to a $50,000 down payment. The difference between that and the purchase price would mean you’d need a loan amount of $450,000.
Interest Rate
Interest rates on a balloon mortgage tend to be lower than conventional loans. This figure should be provided to you by the lender as part of the approval process. Alternatively, you may also be able to find it on your closing documents.
One thing to note is to not confuse this with your loan’s Annual Percentage Rate (APR). Your loan’s APR is only meant to illustrate the total cost of your loan once certain closing costs and fees have been included. Your loan payments, however, are not impacted by the APR.
Mortgage Term
The mortgage term, or the amortization period of the loan, is the length of time your payments are spread over. The longer the term, the lower your payments will be. Typically on a traditional loan, making regular payments throughout this timeframe will allow the loan to be fully paid off at the end of the amortization period.
A balloon mortgage, however, requires full repayment before the end of the amortization period. As a result, you would not have enough time to pay off the entirety of the loan and would be required to make a lump-sum balloon payment on the designated payoff date.
Balloon Payoff Year
The balloon payoff year is how many years you have before you must pay the loan balance in full. The financing term will vary depending on the loan type and lender.
For example, entering a figure of “10” into this field means that you’ll have 10 years to satisfy the loan. The figure entered in this field should be shorter than the mortgage term or amortization period of the loan.
Balloon Mortgage Calculator Outputs
Once you’ve entered all of the figures for the calculator, you’ll be given outputs for your monthly loan payment, your final lump-sum balloon payment, and the total interest charges you will have paid over the life of the loan. Here’s what to consider for each of these figures.
Monthly Payment
The monthly payment output provided by the calculator represents the minimum monthly payment amount you’ll be required to make during the loan term. This payment consists of a portion of principal and interest, which means that the balance of your loan will go down with each subsequent payment. Ensure that you’ll be able to afford your monthly payment, and your ability to continue making payments if your income temporarily drops.
Balloon Payment
The balloon payment calculated is the lump-sum payment you’ll be required to make at the end of your loan term. This is an important figure to consider. If you’re unable to make this payment when it’s due, you’ll be considered in default of your loan agreement and you risk losing your home if it’s seized by the lender.
Before agreeing to take on a balloon mortgage, consider how you’ll come up with the funds needed for this balloon payment. Many borrowers satisfy this payment by replacing it with permanent financing elsewhere.
Total Interest Paid
The last output represents the total amount of interest charges you will have incurred over the term of the loan. This is based on the assumption that you’ve made all of your payments on time, and no additional late fees or other penalties were applied. If you’re considering alternative financing options, this is another figure you can use to determine the most affordable loan solution.
How a Balloon Mortgage Works
Balloon mortgages allow a borrower to make lower monthly payments towards a mortgage, with the remaining balance of the loan paid in full at the end of the loan term. This differs from traditional mortgages where monthly payments are made over the course of the loan, and the loan is paid in full at the end of the loan term from these monthly installments.
They can have varying structures based on the terms and amortization period of the loan, and can also have either a fixed or variable interest rate. This type of loan usually comes with shorter loan terms than traditional mortgages, usually between five to 10 years.
In many cases, a balloon mortgage will have payments structured to cover both principal and interest charges. It can also have payments covering only the accrued interest on the loan or not require any regular installment payments at all until the final lump-sum amount is due.
Examples of a Balloon Mortgage
There are various methods to repay a balloon mortgage, including principal and interest payments, interest-only payments, and no installment payments. Learn more about each applicable scenario below:
Principal and Interest Payments
Balloon mortgages that cover the principal and interest charges of your loan will have a loan term shorter than the amortization period. As an example, a balloon mortgage could have a 30-year amortization but require full repayment in 10 years. In this instance, while your regular monthly payments will help in lowering the principal balance of your loan, it won’t be enough to pay off the loan by the due date in 10 years.
By comparison, a fully amortized loan could have a 30-year amortization and 30 years of payments. Since the amortization matches the loan term, making regular monthly payments would result in the loan balance being paid in full at the end of the repayment period.
Interest-only Payments
If a balloon mortgage is structured to have interest-only payments, the balance on your loan will not change. When your loan term ends, you’ll be required to make a final lump-sum balloon payment equal to the current loan balance.
To illustrate how this might work, let’s take a $100,000 balloon mortgage at a 10% interest rate, and a loan term of five years:
- Monthly payments: $833.33 (calculated by taking the $100,000 loan amount, multiplying it by the interest rate of 10%, and then dividing the answer by 12 months to get a monthly figure)
- Total interest charges paid: $50,000 (calculated by multiplying the $833.33 in monthly payments by the 5 years of loan payments)
- Final balloon payment amount: $100,000 (the principal amount remained unchanged over the life of the loan because the monthly payments only covered the interest charges)
No Installment Payments
Balloon mortgages that require no installment payments typically require a final lump-sum payment that consists of the original loan balance and the total accrued interest charges. Using the same scenario from above, this would mean you would have a final balloon payment of $150,000. This is calculated by taking the original loan balance of $100,000 and adding the accrued interest charges of $50,000.
Who Should Consider a Balloon Mortgage
Balloon mortgages may be a good option for a variety of real estate investors who are looking to obtain property with and take advantage of lower monthly payments compared to traditional financing methods. However, a balloon mortgage can be more difficult to find, and it also carries certain risks that may not make this an ideal fit for everyone.
Here are some scenarios in which you might want to consider getting a balloon mortgage:
- Investors looking to flip a property: Certain types of loans, such as short-term hard money loans with a balloon payment, have more flexible eligibility criteria that will allow an investor to purchase a property in need of repairs. If you plan on repairing a property so that it will be eligible for traditional financing, a balloon mortgage can give you the funds needed to acquire and complete the necessary repairs or renovations. Once completed, you can then replace the balloon mortgage with a different loan type.
- Borrowers unable to qualify for traditional loans: Balloon mortgages tend to be easier to get and can be a viable solution for borrowers who have bad credit, poor finances, or other circumstances that make them ineligible for other loans. For example, rehab loans are commonly used to allow investors to acquire and fund property improvements. Traditional mortgages, by comparison, often require a property to currently be in good condition with no needed repairs, or health or safety hazards present.
- Investors looking to maximize cash flow: Since balloon mortgages have low or no monthly payments, it can help with increasing your property’s cash flow. Also, consider checking out our cash flow management tips. Depending on how the loan payments are structured, however, investors should be aware that they may not build equity in the property as quickly.
- Property owners who want to have a lower monthly payment: Balloon mortgages tend to have lower interest rates. They can also be structured to have interest-only payments. In some cases, you may not even be required to make any payments on a balloon mortgage until the end of the loan term.
- Borrowers confident in the ability to secure future permanent financing: Since balloon mortgages require a lump-sum payment at the end of the term, you’ll need to have a plan for how you plan on achieving this. In many cases, the balloon payment is satisfied by either selling the property or replacing it with a brand new loan. If you intend on getting a loan, consider how likely you are to qualify based on your credit and finances.
Pros & Cons of a Balloon Mortgage
| PROS | CONS |
|---|---|
| Monthly payments will be lower in comparison to principal & interest payments expected of a traditional mortgage | Qualification requirements may be more strict to demonstrate you are financially capable of making the balloon payment |
| Lower interest rates are applicable since you’ll be making a lump-sum payment at the end of the loan term | Risk of defaulting on the loan and losing the property if you can’t make the lump-sum payment at the end of the loan term |
| Repayment strategy is flexible and allows a borrower to finance multiple properties | Building equity will take longer in comparison to a traditional mortgage due to payment structure |
Where to Get a Balloon Mortgage
Balloon mortgages can be found at different types of lenders, including banks, online lenders, loan brokers, and credit unions. There are also various types of loans that may be eligible for a balloon mortgage. We’ve listed some examples below that you can consider.
- Portfolio loan: A portfolio loan is a type of loan that is not sold on the secondary market. As a result, lenders that issue portfolio loans have more flexibility in dictating the loan requirements, terms, and eligibility criteria. See our picks for the leading portfolio lenders.
- Rehabilitation loan: Rehab loans, sometimes also called fix-to-rent loans, allow borrowers to use funds to acquire and conduct the necessary improvements to a piece of property. These are often short-term loans designed to be replaced with permanent financing after repairs have been completed. We recommend considering LendingOne for this type of loan. It can issue funding in as little as 10 days and also made our list of the best investment property loans.
- Hard money loan: Hard money loans are typically designed for borrowers who cannot qualify for other loan types. Common reasons include bad credit, finances, or poor property conditions. Similar to rehab loans, hard money loans are often short-term in nature with the requirement to be paid in full within 18 months. See the lenders that made it to our roundup of the best hard money providers.
Regardless of which type of loan you decide to get, our tips on how to get a small business loan can improve your approval odds and get you through the loan process faster.
Frequently Asked Questions (FAQs)
A balloon payment is calculated with the consideration of a few factors, such as the purchase price of the property, the down payment you’ll be providing, the interest rate set by the lender, and the term of the loan. These factors will play a part in determining the amount of your balloon payment and will vary accordingly.
Generally, the main difference between the two is the repayment structure. Balloon mortgages require that you repay the loan via a lump-sum payment at the end of the loan term, whereas traditional mortgages require installments or principal and interest on a recurring, usually monthly, schedule that pays off the total loan balance over time.
There are a variety of applicable benefits for borrowers looking to finance their real estate investment with a balloon mortgage. This can include low or no monthly payments, lower interest rates, and more flexibility to partake in multiple investment opportunities at once.
Bottom Line
Our balloon payment calculator can help you determine items such as the potential monthly repayment amount, final lump-sum payment, and total interest charges associated with your real estate investment. It’s important to understand the total costs that may arise with the loan before you proceed with this type of mortgage.
To get the best rate, we recommend reading our piece on how CRE rates are determined for different types of commercial real estate loans. As with any loan, it’s important to understand the risks associated with borrowing money and to consider alternatives so that you can choose the best financing option for your circumstances.
