A balloon mortgage (also known as a “balloon payment mortgage” or “partial amortization loan”) starts off with low interest rates and small monthly payments. After a certain period (usually 3 to 7 years) the payments will “balloon” and the borrower must pay the remaining loan balance in full. While balloon mortgages are usually offered as short-term fixed-rate loans, some come with adjustable rates. [See related article “Fixed Mortgage Rates vs. Adjustable Mortgage Rates”]
A balloon mortgage may have a term of only 5 or 7 years, but the monthly payments will be calculated as if it were a 30-year loan (which reduces the size of the payments). The interest rates for balloon mortgages are typically lower than comparable 30-year fixed mortgages.
At the end of the balloon period, the borrower generally has 2 options:
- Pay off the loan in full with an out-of-pocket, lump-sum payment
- Refinance the loan
Ideally you can pay off the balance with money from your savings. However, many borrowers choose to refinance their loans to avoid the balloon payment by converting to a fixed-rate mortgage based on their outstanding balance. Keep in mind that mortgage refinancing can be expensive and difficult to qualify for ― especially if property values fall, if you lose your job, or if your credit score drops. Some mortgage lenders may a guarantee refinancing option, but that often comes with a higher mortgage rate.
Using a balloon mortgage calculator (like the one below) can help you determine what your loan payment amounts will be. Remember that this mortgage calculator does not take into account your potential property taxes and mortgage insurance premiums, which will add to your monthly housing expenses.
MORTGAGE CALCULATOR: How Much Will My Payments Be for a Balloon Mortgage?
This mortgage calculator computes your payments for a balloon mortgage based on the information you provide. There are 5 parts to the balloon mortgage calculator:
Part 1 ― Home Price: The purchase price of the house you are buying
Part 2 ― Down Payment: The amount of your down payment (as a percentage of the home’s sale price or a dollar figure)
Part 3 ― Amortized Over: The length of your amortization term (in months or years) [See related article “Understanding Amortization on Fixed Mortgages”]
Part 4 ― Balloon Payment After: The amount of time (in months or years) after which your balloon payment will be due
Part 5 ― Interest Rate: The amount of interest you are charged by the lender (as a percentage)
As an additional option, you may check the box next to “Show payment schedule” and the mortgage calculator will generate a chart of every monthly payment amount you will owe throughout the life of your loan.
FOR EXAMPLE: Let’s consider the following assumptions for the balloon mortgage calculator:
Home Price ― $350,000
Down Payment ― 20% (or $70,000)
Amortized Over ― 30 years
Balloon Payment After ― 10 years
Interest Rate ― 5.125%
Based on the above assumptions, the mortgage calculator generates the following results:
Home Price ― $350,000.00
Down Payment Amount ― 20.000%
Total Amount Financed ― $280,000.00
Payment Amount ― $1,524.56
Balloon Payment ― $230,136.28
Total Payments ― $181,422.64
Interest Rate ― 5.125%
Total Interest ― $131,558.92
Balloon mortgages are good for homebuyers who can make large down payments, as well as those who plan to sell the home before their balloon payment is due. Bear in mind, if the borrower cannot make that final payment, he/she risks foreclosure.