Mortgage Basics
What Is a Balloon Mortgage?
A balloon mortgage is a loan with lower monthly payments based on a longer amortization period, but with the remaining balance due in full as a large lump-sum payment at the end of a short term. Balloon mortgages are common in commercial real estate and occasionally appear in residential transactions.
How Balloon Mortgages Work
Example: a 7-year balloon mortgage with 30-year amortization. Monthly payments are calculated as if it were a standard 30-year loan — keeping payments low. But after 7 years, the entire remaining balance is due in one lump sum. The borrower must pay off the balance, sell the property, or refinance before the balloon date.
Common balloon structures are described as 5/25, 7/23, or similar: a 5-year term on a 25-year amortization schedule, or a 7-year term on a 23-year amortization. The first number is when the balloon payment is due; the second is the amortization period used to calculate monthly payments.
Real Estate Exam Key Points
Balloon mortgages are NOT fully amortizing — a large lump sum is due at term end
Monthly payments are calculated on a longer amortization than the actual term
Common in commercial real estate; less common in residential
Primary risk: inability to refinance or pay the balloon at maturity
5/25, 7/23 structures: first number = balloon date, second = amortization period
If the borrower can't pay the balloon, they may default and face foreclosure
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