A balloon mortgage is a mortgage where the payments are not large enough to pay off the entire mortgage during its amortization period. Thus, the borrower must make an extra-large payment at the end of the amortization period to fully pay off the loan. Under 24 C.F.R. § 81.2, a balloon mortgage’s final payment must be at least 5 percent more than the periodic payments. For example, a balloon mortgage on a home might have a $500 month normal mortgage payment, and require a final payment of $2,000.
Balloon mortgages are most commonly used for commercial mortgages. Sometimes, commercial developers take out a balloon mortgage, planning to refinance later with a traditional mortgage. This strategy can put the developer in a very bad position if they are unable to refinance. This problem is increasingly frequent due to the recent economic turmoil.
See e.g., In re Williams, 109 B.R. 36 (1989)
See also: Debtor and Creditor Law
[Last updated in June of 2022 by the Wex Definitions Team]