What is a balloon loan?

A balloon loan is any mortgage loan that requires a larger-than-usual payment at the end of the loan term. Generally, a balloon payment is more than one and a half or two times the loan’s average monthly payment, and often it can be tens of thousands of dollars. Most balloon loans require one large, lump sum payment that pays off your remaining balance at the end of the loan. If you decide on a balloon loan, you will need to determine if and how you can make the balloon payment when it comes due.

TIP: Don't assume you’ll be able to sell your home or refinance your loan before you have to make a balloon payment. The value of your property could decline or your financial condition could change. If you can’t afford paying off a balloon payment when it comes due – for instance, out of your savings – consider another loan.