$
Total loan principal
Enter loan amount
%
Annual rate (APR)
Enter rate (0.1–30%)
yrs
Used to compute monthly payment
Enter 1–40 years
yrs
When the lump sum is due (must be < amort period)
Enter 1–40 years (less than amort period)
Result
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How Balloon Loans Work
A balloon loan is structured so that monthly payments are calculated over a longer amortisation period (e.g., 30 years), but the remaining balance comes due as a single lump sum at a shorter term (e.g., 7 years). The monthly payments are lower than a fully amortising loan, but the borrower must pay off the remaining balance — the balloon — when the term ends.
Balloon loans are common in commercial real estate, business financing, and some residential mortgage products. They carry refinancing risk: if interest rates rise or creditworthiness changes before the balloon date, refinancing may be expensive or unavailable.
Formula
Monthly Payment = P × [r(1+r)^n] / [(1+r)^n − 1]
Where P = principal, r = monthly rate (annual rate / 12), n = full amortisation months. The balloon balance is the remaining principal after the balloon term months of payments. Example: $300,000 at 6.5% over 30yr amort, 7yr balloon: $1,896/mo payment, ~$272,000 balloon due at year 7.
💡 Pro tip: Always stress-test your balloon loan at a higher interest rate. If rates rise 2% before your balloon date, your refinanced payment could be significantly higher. Build a refinance or payoff plan before signing.
📚 Sources: CFPB Mortgage Types, Investopedia — Balloon Payments
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Frequently Asked Questions
A balloon loan has lower monthly payments based on a long amortisation (e.g., 30 years), but the remaining principal balance is due all at once at the end of a shorter term (e.g., 7 years).
Monthly payments are calculated using the full amortisation period. At the balloon term, the remaining unpaid principal is the balloon amount — typically the vast majority of the original loan.
Yes. The main risk is refinancing risk. If rates rise or your financial situation changes before the balloon date, you may face higher refinancing costs or default risk.
Common structures are 5-year or 7-year balloon with 30-year amortisation. Payments are set as if the loan goes 30 years, but full balance is due at year 5 or 7.
Yes. Most borrowers refinance into a new loan before the balloon. Some loans include a reset option. Always check for prepayment penalties in your loan documents.
Balloon loans are common in commercial real estate where properties may be sold or refinanced before the balloon date. They're also used by borrowers expecting significant income increases or asset sales before payment is due. They're rarely used in primary residential mortgages today due to post-2008 qualified mortgage rules.