Balloon Mortgage: Definition, Who It’s For, Pros and Cons

A balloon mortgage is a home loan with low monthly payments for a few years, after which you must pay the remaining balance in a lump sum. You get a lower interest rate than with longer-term fixed-rate mortgages, in exchange for having to pay off the outstanding loan amount after a set period, often between five and 10 years.

Balloon loans are rare because they're considered risky.

Who a balloon mortgage is for

A balloon mortgage may be suitable if:

• You're certain that you will sell the property before the balloon payment comes due.

• You're sure that you'll receive a lump sum at least equal to the balloon payment before it comes due. That could be something like a bonus or series of annual bonuses, an inheritance or the sale of another property.

• You'll refinance the loan before the end of the term.

» MORE: Review how mortgage rates are trending

Balloon mortgage pros and cons

Pro

• You’ll probably get a lower interest rate than with a typical fixed-rate loan — and that means a lower monthly payment.

Cons

• Despite your plans, you might not be able to sell or refinance.

• Interest rates might be higher when you need to refinance before the balloon payment is due, leaving you with higher-than-expected monthly payments.

• Your expected financial windfall might not arrive.

• If you can’t make the balloon payment, the lender can foreclose on the house.

A balloon mortgage could be hard to find

Balloon mortgages were a thing back in the Wild West days of home loans, just before the housing crash of 2007-08. Today, they can be hard to find. Balloon loans might be available from small lenders.

An adjustable-rate mortgage might be a better solution for most short- to mid-term borrowers because ARMs have rate caps that limit how high the interest rate can rise. Even better: There’s no ticking time bomb of a looming balloon payment.