A balloon mortgage is a type of loan that requires a final lump-sum payment to be made at the end of the financing term. By comparison, fully amortized loans do not require this lump-sum balloon payment as the balance is typically paid in equal installments over a period.
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 above 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 Lendio, a business loan broker with over 75 lenders in its network. Working with it allows you to get paired with a dedicated loan specialist who can match you with the lenders best suited for your circumstances.
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 home, this figure will be what you’ve agreed to pay for the property. 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.
Other places you can look to confirm the correct amount can include 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
Your down payment is the amount of money you’ll be putting towards the property. Depending on the type of loan you get, you could be required to make a minimum down payment 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 won’t have had 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 it in full. 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 first figure provided by our calculator is the minimum monthly payment you’ll be required to make for the length of your loan. 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 by our calculator 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 the loan and you risk losing your home to 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 final figure you’ll be given by our calculator is the total amount of interest charges you will have paid over the lifetime of the loan. This assumes that you make all of your payments in a timely manner and that 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
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.
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 the 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 can allow you to obtain property with the additional benefit of getting 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, 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 to achieve 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.
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. Different types of loans may also be classified as 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.
Bottom Line
With a balloon mortgage, it’s important to understand the total costs associated with the loan. Our calculator will help you determine your monthly payment amounts, your final balloon payment, and the total interest charges you’ll pay.
To get the best rate, we recommend reading our piece on how rates are determined for different types of commercial real estate (CRE) 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.