Balloon Payment
Balloon Payment
The lump sum due at the end of a balloon loan: the balance remaining after n years of regular payments that were sized for a longer amortization.
When to use: Use for balloon mortgages, commercial loans amortized over 25 or 30 years but due in 5, 7 or 10, and any loan where regular payments stop before the balance is retired.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| Balloon | Balloon Payment | Balance due when regular payments stop | $ |
| PV | Original Loan | Original loan amount | $ |
| PMT | Payment | Regular periodic payment | $ |
| k | Interest Rate | Annual interest rate | % |
| m | Payments per Year | Number of payments per year | integer |
| n | Years Until Balloon | Years of regular payments before the balloon is due | years |
Real-Life Examples
Example 1: 7-Year Balloon on a 30-Year Schedule
A $500,000 loan at 6% with payments of $2,997.75, sized for 30-year amortization but due after 7 years. Balloon?
Given
Step-by-Step
After seven years of $2,998 payments, almost 90% of the loan is still owed in one lump. Balloon structures depend on refinancing or selling before the due date.
Example 2: 5-Year Balloon
A $200,000 loan at 5% with $1,073.64 payments (30-year amortization) due in 5 years.
Given
Step-by-Step
Only $16,342 of principal has been repaid in five years. The balloon is nearly the whole original loan.
Frequently Asked Questions
Yes. A balloon is simply the remaining balance at the moment the regular payments stop, so this formula is the remaining-balance formula evaluated at n years.
Usually from a longer amortization schedule than the loan's actual term, which keeps the payment low and leaves a large balance to be paid or refinanced at maturity.