ABA Family Legal Guide

Buying and Selling a Home

Financing a Home Purchase

Different Types of Loans

What is a balloon loan?

With a balloon loan, the buyer is expected to pay off the unpaid balance of the loan completely within a fixed period of time, usually in three, five, or seven years, instead of making regular payments to completely pay off the loan. The interest rate can be fixed or variable, but in all cases the (usually substantial) unpaid balance is due at the time specified. Usually, the borrower must either refinance or sell the home to pay off the loan. Because most payments at the beginning of the loan go to pay off the interest rather than the principal, the balance at the time of the loan payoff will probably be nearly the same as the original loan.

To attract buyers, builders often offer balloon loans during periods of high interest rates when home sales are sluggish. In most cases, the interest rate will be lower than prevailing institutional home loan rates. However, if interest rates are high when full payment is due, refinancing may not be possible. The balloon will burst, resulting in foreclosure or forced sale and loss of the home.