Definition
A large lump-sum payment due at the end of a loan whose regular payments were too small to pay off the balance. The monthly payments are set as if the loan ran for a long term, but the loan actually matures much sooner, leaving the remaining principal due all at once.
Why it matters
Low payments up front are the bait; the balloon is the hook. Borrowers who cannot pay or refinance when the balloon arrives risk default on a loan they have paid faithfully for years, which is why balloons appear in commercial and seller-financed deals more than in mainstream consumer mortgages.
Example
A seller finances $200,000 at 6% with payments calculated on a 30-year schedule, about $1,199 a month, but the note matures in 7 years. After 84 payments the borrower still owes roughly $179,000, all due at once, so they need a refinance or a sale by year seven.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.