What is a balloon payment loan?
A balloon loan charges monthly payments calculated as if the loan were amortized over a long schedule (often 30 years), but the loan actually ends much sooner (often 5–7 years). At that point the entire remaining balance — the balloon payment — comes due in one lump sum. The result is low monthly payments during the term but a large final obligation, which borrowers usually cover by refinancing, selling the asset, or paying cash.
How is the balloon payment calculated?
First the monthly payment is computed over the full amortization period: PMT = P × i / (1 − (1 + i)⁻ⁿ), where i is the monthly rate and n is the total amortization months. The balloon equals the balance remaining when the shorter loan term ends: B = P(1 + i)ᵗ − PMT × ((1 + i)ᵗ − 1) / i, where t is the number of payments actually made. Because early payments are mostly interest, the balloon is often 80–95% of the original loan on a 7/30 structure.
What are the risks of a balloon loan?
The main risk is being unable to pay or refinance the balloon when it comes due. If interest rates have risen, refinancing will be more expensive; if the asset's value has fallen or your credit has weakened, refinancing may be declined entirely, potentially forcing a sale or default. Balloon loans suit borrowers who are confident they will sell or refinance before the term ends, or who expect a large future cash inflow.
What does a "7/30 balloon" mean?
The first number is the loan term (when the balloon is due) and the second is the amortization schedule used to size the monthly payments. A 7/30 balloon has payments calculated as if you were paying the loan off over 30 years, but after 7 years of payments the remaining balance must be paid in full. Common structures include 5/30, 7/30, and 10/30 in real estate lending.