How do Balloon Payments Work?

Mortgage 101
Nontraditional Mortgages
What is a Balloon Payment? A balloon payment is when you have to make a one-time payment on your loan before the maturity date. It may be due at the end of the term, or it could be spread out over time.
Published on
July 27, 2023
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Introduction

Buying a home is exciting, but it can also be a little intimidating. You may be wondering how to make monthly mortgage payments on your new home, or whether you can afford the house that you want in the first place. When you get a traditional 30-year fixed rate mortgage, most of your monthly payment is going toward interest rather than principal each month. This means that even though you may have purchased your home for $300,000 (or whatever amount), only $100 per month will go toward paying down that principal balance each month while interest continues to accrue on what's left unpaid each month.

Balloon payments are an alternative way of financing where more than one-third of your total loan amount has been paid off by the end date so that there isn't much left for interest payments after this point (the remaining amount is instead treated as a final balloon payment). Balloon payments allow homeowners to buy bigger houses without having to make high monthly payments early in their term—but keep in mind that these terms might also mean higher interest rates over time because borrowers are taking on more risk with less cushion against unexpected fees or expenses later on.

What is a Balloon Payment?

A balloon payment is a one-time payment at the end of a loan. They are usually large, so if you have one coming up, it can be stressful to know how to pay for it. Balloon payments can be paid in a single payment or in multiple payments over time. This article explains what balloon payments are and how they work.

Balloon loans are often used by home buyers to get out from underneath their mortgage early so that they don't have to worry about having monthly payments for 30 years or longer after they move into their new home.

How Does a Balloon Payment Work?

A balloon payment is a large sum that is due at the end of the loan term. Balloon payments allow you to have low monthly mortgage payments early in the term of your loan, but can result in higher monthly payments and overall interest costs for borrowers who plan to sell or refinance before their loan terms expire.

A balloon payment may be required if you take out a non-qualified mortgage on your home (a home equity line of credit [HELOC], for example). The U.S. Department of Housing and Urban Development publishes guidelines for Fannie Mae, Freddie Mac, FHA loans and VA mortgages used by lenders when making decisions about whether or not to lend money to applicants with low down payments. These guidelines require banks and other financial institutions offering non-qualified mortgages to verify that they have enough cash reserves available in order to pay back their customers if they default on their loans before maturity.

How to Get a Mortgage with a Balloon Payment

If you’re looking for a home loan with a balloon payment, there are several ways to go about it.

  • Find out what kind of mortgage your lender is offering. If they have their own proprietary or third-party program in place that allows for mid-term payments, this could be a good choice for you.
  • Consider an adjustable-rate mortgage (ARM) or interest-only loan: These types of loans are more flexible because they allow payments to fluctuate based on market conditions and other factors.
A balloon payment allows you to have low monthly mortgage payments early in the term of your loan.

A balloon payment is a lump sum payment that is due at the end of your loan. The idea behind this type of payment structure is that you can have low monthly mortgage payments early in the term of your loan, and then have one large final payment at the end. Balloon payments are common with 30 year mortgages, but many lenders will allow you to use them with shorter terms as well.

Depending on how much time remains in your mortgage term, a balloon can be anywhere from 5% to 100% of what's left on your loan balance. For example: A $100,000 30-year fixed rate mortgage has five years remaining when it comes up for renewal; it would be reasonable for you to ask for an 80/20 split — which would mean that 20% ($20k) would become due in year six and 80% ($80k) at year seven (and so on).

Yes, You Can Afford Your Dream Home

The good news is that balloon payment mortgages are available to everyone. You can even get a balloon payment mortgage with as little as 10% down, which makes them an attractive option for first-time homebuyers who want to make their dream of homeownership come true but don't have the cash on hand for a large down payment.

Balloon payments are also useful in other situations: if you're looking to refinance your current home loan and pay off your old mortgage early, or if you're purchasing another property using the equity in your current home (also known as "cash-out refinancing").

And buying a house isn't the only way to use a balloon payment mortgage. Many people use these loans to refinance their existing mortgage when they need extra money for renovations or repairs on their house or property (such as fixing broken pipes or repairing rotten wood).

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