What Is a Balloon Payment?

In real estate, this means a large amount that you have to give as final payment at the end of a balloon loan (such as an amortized loan, a mortgage, or a commercial loan). This type of financing typically requires that only a portion of the loan’s principal is amortized and has a relatively shorter term. When the term reaches its end, you have to give the last payment which is the remaining amount that hasn’t been repaid.

The main reason why it is called a balloon loan is that the final payment has ballooned and is rather huge — usually twice as much as the previous payments you made on the loan. Some may even be as big as a six-figure amount.

This type of lending is used more commonly by commercial entities rather than by individuals/consumers.

Usually, a balloon payment is set up as a two-step mortgage. This means a home loan comes with a fixed interest rate for a set number of months. Upon the end of that repayment term, the mortgage is reset. This time, the balloon loan will require amortized monthly payments with an interest that meets the current market rates. Some two-step mortgages do not automatically reset the rates.
 

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