A balloon payment is the last payment you’ll make on your balloon mortgage.
What is a balloon payment?
A balloon payment (unrelated to birthday parties) is the final payment on a balloon mortgage. What’s a balloon mortgage? It’s a specific (and lesser known) kind of mortgage that divvies up your monthly payment differently.
With traditional mortgages, you pay a monthly amount:
Monthly mortgage payment = part of the cost of the house (principal) + the cost of borrowing money (interest) + taxes and insurance (escrow)
With balloon mortgages, you’ll pay a much smaller amount every month (usually, only the cost of borrowing money), and pay a big chunk at the end – and that’s the balloon payment!
Think of your payments like a balloon deflating… slowly, and then all at once.
How do balloon payments work?
When it comes to financing your balloon mortgage, your bank will let you know how much you should pay each month. Usually, you’ll only have to pay the interest – aka, the cost of borrowing money.
Because of that, you’ll have lower monthly payments compared to a typical loan. But take note that the less you pay now, the more you’ll owe later to make up the difference on your mortgage.
Is a balloon mortgage right for you?
Balloon mortgages are risky because of that final balloon payment on your loan. If you’re lured by the lower monthly payments, remember that you’re not really paying less for your mortgage – you’re just paying most of your mortgage later.
It may be worth getting a balloon mortgage if one or more of the below are true for you:
- Your bank offers you a significantly lower interest rate than it does with a traditional mortgage
- You have a solid reason to expect a big increase in your personal finances before the final balloon payment is due on your loan
- You don’t plan to own the property for long and are confident you’ll be able to sell it before the balloon payment is due on your loan