Definition
A balloon payment is a large, lump-sum payment due at the end of a loan term. Balloon loans typically have lower monthly payments during the loan term because they are calculated as if the loan has a longer term, but the entire remaining balance becomes due at a specified date. These loans can be risky for borrowers who may not have the funds to make the final payment or refinance when it comes due.
Formula
Where P is principal, r is monthly interest rate, and n is the amortization period (not the actual loan term). The balloon payment is the remaining principal balance at the end of the loan term.
Example
Balloon Mortgage Example
A 7-year balloon mortgage for $200,000 at 5% interest might have monthly payments calculated as if it were a 30-year mortgage ($1,074). After 7 years of payments, the remaining balance (the balloon payment) of approximately $176,000 becomes due immediately. The borrower must pay this amount in cash, refinance, or sell the property.