balloon mortgage

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 monthly mortgage payment and require a single balloon payment of $2,000 due after a specified period.

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 precarious position if they are unable to refinance.

See e.g., In re Williams, 109 B.R. 36 (1989)