This article is part of a larger series on Business Financing.
A balloon mortgage is a loan that offers low initial monthly payments, and then a large portion of the principal is repaid in a lump sum at the end of the term. A balloon mortgage calculator helps you calculate your monthly mortgage payment, your balloon payment and the total amount of interest paid during the loan.
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How the Balloon Payment Calculator Works
The balloon payment calculator works by taking the things you input like home price and uses an amortization schedule and a balloon payment formula to calculate your monthly payment on your balloon mortgage. It will also tell you how much your balloon payment will be at the end of the loan. After using the free balloon mortgage calculator, you should be able to determine if a balloon mortgage makes sense for you.
A balloon mortgage is a loan that is amortized over 30 years but typically has a loan term between five and seven years. At the end of the loan term, a balloon payment is due, which is a lump sum made up of a large portion of the principal balance. Our balloon loan calculator will do the math for you and estimate how much your balloon payment will be.
The balloon mortgage monthly payment is calculated by using a 30-year amortization table and your interest rate. Your final balloon payment is determined by the remaining principal owed after all of your monthly payments have been made. This balloon payment is a lump sum due at the end of the loan term.
Here is some information to help you assess your results from the balloon payment calculator:
- Typical balloon mortgage interest rate: 4.5 to 5.5%
- Typical balloon loan term: 5 to 7 years
- Balloon payment: The lump sum of what’s owed on the loan at the end of the term
Balloon Mortgage Calculator Inputs
When using our free balloon mortgage calculator, you will be prompted to input your home price, down payment, mortgage amount, term and interest rate. These are the inputs the balloon mortgage payment calculator needs in order to calculate things like your monthly payment. The balloon mortgage calculator uses a balloon payment formula for its calculations, based on an amortization schedule with a balloon.
The details for each input into the mortgage calculator with balloon payment are:
Price of Property
The first input that the balloon mortgage calculator asks for is your home price. This is the purchase price of your property, which is how much you paid for the property. Keep in mind that it’s not what the property is worth today. If you’re considering purchasing a property, this number will appear on your agreement of sale. If you already own the property, the purchase price will be on your HUD-1 settlement statement, which is part of your closing documents.
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Down Payment on Property
The down payment is how much of your own money you put towards the property. It’s the portion that you didn’t finance. For example, if you purchased a property for $100,000 and financed 80 percent of it, your down payment would be 20 percent or $20,000. You can find the amount of your down payment on your agreement of sale and on your HUD-1 statement.
A typical down payment required for a balloon mortgage is 10 percent. If you haven’t purchased the property yet, your balloon mortgage lender will be able to tell you what your minimum down payment is.
Mortgage Amount of Investment Property
The next input needed on the balloon loan calculator is the mortgage amount. This is the amount of the property that you’re financing. Typically, you will finance 90 percent or more with a balloon mortgage. For example, if the purchase price of the property is $100,000 and you put down $10,000 as your down payment, your mortgage amount will be $90,000.
You can find your mortgage amount on your mortgage statement, by contacting your mortgage lender or on your online mortgage account. If you saved your closing documents, your mortgage amount will also be on the mortgage documents that you signed.
Balloon Mortgage Loan Term
A balloon mortgage loan term is the length of the balloon mortgage. Typically, balloon mortgage terms are five to seven years. However, some lenders will fund balloon mortgages with terms up to 15 years. You can find your loan term on your mortgage documents from settlement and on your mortgage statement. If you’re shopping around for a balloon mortgage, the lenders will tell you what terms they offer.
Interest Rate of Balloon Mortgage
Typically, a balloon mortgage interest rate is lower than that of a conforming loan. Balloon mortgage rates are generally 4.5 to 5.5 percent. You can find your interest rate on your mortgage documents from closing, and you can also request it from your lender. If you don’t remember your exact rate, don’t worry, our calculator uses an average rate of 5%.
Balloon Payment Calculator Outputs
After you have input all of the necessary inputs into the balloon mortgage calculator, including home price and interest rate, the calculator will calculate the numbers for you and give you your balloon mortgage monthly payment, your balloon payment and the total interest paid during your balloon mortgage.
The balloon payment calculator uses your inputs and a built-in amortization table based over 30 years to do these calculations. Using our free balloon mortgage calculator will save you time, and you won’t have to do any calculations by hand or search online for an amortization table.
Balloon payment calculator outputs include:
Balloon Mortgage Monthly Payment
The first output that our balloon loan calculator calculates is your monthly mortgage payment. This is the amount of interest and principal that you pay monthly during the term of the loan. This calculation is amortized over 30 years and uses your interest rate to do the calculation. Knowing your monthly mortgage payment will help you decide if a balloon mortgage is a viable option. If you have an interest-only balloon loan, you can choose that input instead of a principal and interest loan.
Next, our balloon mortgage payment calculator calculates your balloon payment. This is the lump sum due at the end of the loan term. It’s when the majority of your principal will be due because during the beginning of the loan term you were paying mostly interest and just a small amount of principal.
The balloon payment is the most important calculation because it dictates whether or not you can afford to get a balloon mortgage. You need to be able to sell the property and pay off this balloon payment, or you need to refinance the mortgage or pay it off with a lump sum. By using our free balloon mortgage calculator, you will find out how much the balloon payment will be and then be able to plan an exit strategy. Some people may also plan on refinancing, and the monthly payment would be a larger indicator of affordability.
Total Interest Paid for Balloon Mortgage
The last output that the balloon mortgage calculator gives you is the total interest paid during your balloon mortgage. This calculation is based on your interest rate, amortization during the loan and the loan term. You will be able to see how much your total interest is and compare it to what interest you would pay by using a different type of loan.
When to Use a Balloon Mortgage
A balloon mortgage can be used by real estate investors and owner-occupants who know they will be selling or refinancing within two to three years. Investors and owner-occupants also use a balloon mortgage when they want to purchase a property but wouldn’t be able to afford it with a conforming loan. The balloon mortgage typically offers low initial monthly mortgage payments because the loan term is typically five to seven years, but the loan is amortized over 30 years. This makes it a more affordable option during the beginning of the loan.
However, a lump sum payment is due at the end of the loan term, so investors should only choose a balloon mortgage if they know they will be able to afford this balloon payment. Some risks involved with using a balloon mortgage include changing property values, interest rate changes and personal income changes. Typically, investors, who plan to sell a property, know they will inherit a lump sum or who will receive a large bonus or salary increase will opt for a balloon mortgage.
A balloon mortgage is a good option to use when:
- An investor with a clear exit strategy in mind to repay the balloon payment, such as selling the property, paying it off or refinancing the loan
- A commercial real estate investor wants initial low payments so he or she can increase cash flow and refinance the property before the balloon payment is due
- A buy-and-hold investor who wants to take advantage of a lower interest rate and a lower monthly payment and who plans on selling or refinancing the property before the balloon is due
- An owner-occupant who wants to purchase a property he or she wouldn’t otherwise qualify for and knows he or she will have the funds to cover the balloon payment
- An investor who wants to rehab a rental property in an up-and-coming area and sell it for a profit before the balloon payment is due
Alternatives to a Balloon Mortgage
A balloon mortgage can be a great option for an investor who wants to take advantage of initially low monthly mortgage payments and is prepared for a lump sum due at the end of the loan term. However, balloon mortgages are specialty loan products and aren’t widely offered. If you can’t find a balloon mortgage lender or realize that a balloon mortgage isn’t right for you, there are some alternatives.
Alternatives to a balloon mortgage include:
- Adjustable rate mortgage (ARM): This is a type of mortgage where the interest rate is initially fixed for a period of time; after that period of time is over, the interest rate resets; ARMs are usually 5/1 or 7/1 meaning they’re fixed for 5 or 7 years, and then can adjust once a year afterward for the duration of the loan; typically, ARMS are used by investors and owner occupants to payer lower interest during the initial period of the loan
- Investment property loan: This type of loan is specifically for investors and can be found through banks, credit unions and online lenders; these loans typically have rates from 5 to 12 percent and terms of 3 to 30 years; investors typically use these loans to purchase buy-and-hold properties
- Hard money loan: This is a short-term loan found through nationwide online lenders or private local lenders; rates are typically 7 to 13 percent and terms are six months to two years; investors use these loans to fix and flip properties or rehab, refinance and rent out a property
- Jumbo loan: This is a specialty type of loan used for properties that don’t qualify for a conforming loan due to their high price range; typically, investors use a jumbo loan to purchase a luxury property, a 1-4 unit building or a property in a high-cost area; owner-occupants use a jumbo loan for a primary residence in a high-cost area or to purchase a luxury home.
The Bottom Line
A balloon payment calculator is a helpful tool used to assist an investor in deciding if a balloon mortgage is right for them. After putting inputs into the balloon mortgage payment calculator like your home price, down payment and mortgage amount, the balloon mortgage payment calculator does the work for you. The balloon payment calculator calculates your monthly mortgage payment, amount of your balloon payment and the total amount of interest paid during the loan.
If you’re an investor looking for a balloon mortgage, check out Kiavi. It’s an online, nationwide lender that offers a streamlined process and can get you prequalified in a few minutes. Its rates are competitive for prime borrowers.