What is a balloon payment? When is one allowed?
A balloon payment is a larger-than-usual one-time payment at the end of the loan term. If you have a mortgage with a balloon payment, your payments may be lower in the years before the balloon payment comes due, but you could 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 term. 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.
Tip: A mortgage with a balloon payment can be risky because you owe a larger payment at the end of the loan.
If the value of your property falls, or if your financial condition declines, you might not be able to sell or refinance in time before the final balloon payment comes due. 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.