Balloon mortgages charge lower monthly payments during an introductory period. When this intro period ends, the loan’s remaining balance comes due — all at once.
When it comes due, the loan’s balance is large. This lump-sum payment is called the balloon payment, and it’s where balloon mortgages get their name.
Believe it or not, this was a common way to finance a home in the 19th and early 20th centuries — before the Great Depression upended the financial system and gave rise to more stable loans like the 30-year fixed.
But balloon mortgages still exist, and some buyers still use them.
How Do Balloon Mortgages Work?
Compared to most mortgages, balloon mortgages ask less of borrowers upfront. Depending on the loan’s structure, the borrower’s initial monthly payments might be:
- Interest only
- Mostly interest with some principal
- Nothing — some balloon loans require no payments at all during the introductory period
Say you took out a $250,000 balloon mortgage at 7 percent interest and owed only interest payments for five years:
| $250,000 loan at 7 percent APR | 5-year balloon loan interest only | 30-year fixed mortgage |
| Monthly Payments 1-60 (five years) | $1,458 each | $1,663 each |
| Balance after five years | $250,000 | $235,330 |
| Payment 61 | $250,000 (balloon payment) | $1,663 |
| Payments 62-360 | N/A | $1,663 each |
Monthly payments listed here do not include taxes or insurance.
The balloon mortgage’s interest-only payments during the first five years would save $12,300 compared to a 30-year fixed over the same period.
But once the five-year intro period ends, the entire $250,000 comes due. In contrast, the 30-year fixed mortgage continues charging the same $1,663 principal and interest payment for 25 more years — or until the loan is paid off.
What About Balloon Mortgages With No Monthly Payments?
In the example above, the borrower made interest-only payments, keeping the principal balance flat. Some lenders offer no-payment balloon mortgages:
| $250,000 loan at 7 percent APR | 5-year balloon loan no payments | 30-year fixed mortgage |
| Monthly Payments 1-60 (five years) | $0 each | $1,663 each |
| Balance after five years | $337,480 | $235,330 |
| Payment 61 | $337,480 (balloon payment) | $1,663 |
| Payments 62-360 | N/A | $1,663 each |
Monthly payments do not include taxes or insurance.
Since the borrower made no payments in this example, interest accrued for five years — adding to both the principal balance and the eventual balloon payment.
Pros and Cons of Balloon Mortgages
Balloon mortgages are appealing for their initial low payments, but they come with more risk than traditional mortgages — which also makes them harder to find.
| Balloon Mortgage Pros | Balloon Mortgage Cons |
| Faster approval | Bigger down payment required |
| More flexible underwriting | Higher interest rate |
| Temporary savings from lower payments | The balloon payment itself |
| A way to leverage a more valuable property | Lack of consumer protections |
Where Do You Get a Balloon Mortgage?
Balloon mortgages are non-QM loans. Non-QM stands for non-qualifying mortgage — meaning they are not regulated by the Consumer Financial Protection Bureau (CFPB).
You won’t find balloon loans on the shelf at your local bank or credit union alongside 15- and 30-year fixed options. Instead, you’d need to shop with non-QM loan specialists, many of which operate as online-only lenders, though some have brick-and-mortar offices.
Since they’re not CFPB-regulated, it’s up to the borrower to stay protected. Always read and fully understand the terms of a non-QM loan before signing. Consider having an attorney or financial advisor review the documents.
Balloon Mortgage Down Payments and Interest Rates
Non-QM lenders take on more individual risk because their loans aren’t insured by the federal government or sold to investors after closing. If a loan went bad, the lender could face significant losses.
To offset this risk, lenders typically charge higher interest rates and require larger down payments on balloon mortgages. Those 19th-century balloon loans required 50 percent down. Today’s balloon mortgages typically require at least 20 percent.
Non-QM loans do offer some flexibility in return: since they don’t have to conform to government or investor guidelines, lenders can accommodate unconventional borrowers — such as those with lower credit scores or non-traditional income sources.
Non-QM lenders can also close loans faster and with less red tape than traditional lenders.
Why Would Someone Choose a Balloon Mortgage?
Balloon mortgages offer short-term savings — but can that justify the large payment looming at the end?
For most homebuyers, the answer is no. The 30-year fixed mortgage has made homeownership possible for tens of millions of Americans since its creation in 1934, and it remains the most stable option for the vast majority of borrowers.
That said, balloon mortgages can still make sense for certain buyers:
- Landlords: Since many landlords own multiple properties, they could sell or refinance one to cover a balloon payment on another if needed.
- House flippers: Lower monthly payments can improve profit margins on a flip, and the home will be sold long before the balloon payment comes due.
- Real estate developers: Businesses acquiring property may want to spread out costs without traditional financing — balloon loans can help.
- Frequent movers: Someone who already knows they’ll sell within a few years may prefer the lower initial payments, or use them to afford a more valuable home.
- People with fluctuating finances: Someone expecting a significant income increase or inheritance could use a balloon mortgage as a short-term bridge.
In all of these cases, the buyer expects to be rid of the balloon mortgage before the payment comes due — or expects their financial situation to change in a way that makes the payment manageable.
The common thread: balloon loans can work for buyers who prioritize immediate cash flow over long-term stability and simplicity — and who have a clear exit strategy from Day 1.
What if I Can’t Afford My Balloon Payment?
Let’s say you got a balloon loan knowing you’d sell the home long before the payment came due — but plans have changed and you’d like to stay. There’s no way you can afford the balloon payment. What can you do?
For many borrowers, the best solution is to refinance. Refinancing converts the balloon payment into a traditional mortgage — a 30-year or 15-year fixed, for example — with manageable monthly payments going forward.
Plan to Refinance Ahead of Time
Refinancing isn’t always a sure thing. If you’re a residential buyer considering a balloon loan, start planning for the eventual refinance from day one.
Here’s how to set yourself up for success:
- Pay more each month: Making extra payments toward the principal — even when not required — will build equity faster and make a future refinance easier.
- Put as much down as possible: A larger down payment gives you a head start on equity, which is a key factor in qualifying for a refinance later.
- Buy in an appreciating area: Property appreciation builds equity over time. While no one can predict a local market, it’s wise to avoid areas that are historically slow to appreciate or prone to value declines.
The more equity you have when it’s time to refinance, the easier and less expensive the process will be.
Balloon Mortgage Alternatives
If a balloon mortgage feels too risky but you’re open to alternatives to the standard 30-year fixed, consider an adjustable-rate mortgage (ARM).
ARMs share some surface similarities with balloon mortgages — lower initial payments during an introductory period — but without the large lump-sum payment at the end. Instead of a balloon payment, the remaining balance automatically adjusts to a new interest rate at the end of the fixed period.
With a 7/1 ARM, for example, the loan charges level payments for seven years. After that, the rate adjusts annually based on market conditions — potentially going up or down — until the loan is paid off.
The CFPB regulates how much an ARM rate can increase from year to year and caps the total increase over the life of the loan, making today’s ARMs considerably less risky than those used in the early 2000s.
One current advantage of ARMs: their average mortgage rate is typically lower than that of a 30-year fixed.
Should You Get a Balloon Mortgage?
Before getting a balloon mortgage, make sure you have two things:
- A genuine need for the loan’s short-term monthly savings
- A clear, realistic plan for handling the balloon payment
Borrowers who have both use balloon mortgages as a strategic tool. Those who don’t risk paying significantly more in the long run.
For many borrowers, the exit plan is a refinance into a conventional mortgage with a predictable monthly payment. If that’s your plan — or if you’re already sitting on a balloon loan and looking for a way out — Refi.com can help. Start your refinance application today and turn that looming balloon payment into a loan you can live with.
