What is a balloon loan? When is one allowed?
Answer: A balloon loan is a mortgage that requires a larger-than-usual one-time payment at the end of the term. This can mean your payments are lower in the years before the balloon payment comes due but you will owe a big amount at the end of the loan.
Generally, a balloon payment is more than two times the loan’s average monthly payment, and often it can be tens of thousands of dollars. Most balloon loans require one large payment that pays off your remaining balance at the end of the loan. If you’re considering a balloon loan, you need to think about whether and how you can make the balloon payment when it comes due.
A balloon payment isn’t allowed in a type of loan called a Qualified Mortgage, with some limited exceptions.
Don't assume you’ll sell your home or refinance your loan before you have to make a balloon payment.
If the value of your property falls, or if your financial condition declines, you might not be able to sell or refinance in time. If you’re not sure how you would manage to pay off the balloon payment when it comes due—for instance, out of your savings—consider another type of loan.