How To Calculate A Balloon Payment

A balloon payment is the unpaid principal left on a loan when it comes due early. The borrower makes regular payments for a set period, and at the end of that period the entire remaining balance is due at once.

The arithmetic is the same arithmetic as any amortising loan, only stopped early. Each month interest accrues on the balance, the payment covers that interest and a little principal, and whatever principal has not been covered by the balloon date is the balloon.

The regular payment is sized as though the loan ran its full amortisation schedule. A 30 year schedule on a 5 year balloon means the payments are the small 30 year ones, which is exactly why so little principal gets repaid and why the balloon is so large.

Two clocks run at once and confusing them is the classic error. The amortisation term sets how big each payment is. The balloon term sets how many of those payments you actually make. They are independent inputs.

The formula has two halves. The first, the original principal grown by compound interest, is what you would owe if you never paid anything. The second is the future value of the payments you did make. The difference is what is left.

Because the payment is calculated on the long schedule, early payments are almost entirely interest. On the example loan, 60 payments of 1,498.88 come to 89,932.80 in cash, but only 17,364.11 of principal has been retired.

That ratio is the whole point of the structure. A borrower gets low monthly outlay for years and then has to refinance, sell, or find cash. The lender's risk is concentrated in that one date.

Balloon loans are common in commercial real estate, where the property is expected to be refinanced or sold well before a 25 or 30 year schedule would run out. They are also used in car finance as a way to advertise a low monthly figure.

A balloon mortgage for an owner occupier is a different animal. Regulators in several countries restrict them precisely because a borrower can reach the balloon date unable to refinance, and the result is forced sale or default.

The alternative framing is to ask what payment would fully repay the loan over the balloon term instead. On the same 250,000 at 6 percent, paying it off in 60 months rather than 360 needs a very different monthly figure, and comparing the two is the honest way to judge the structure.

Interest rates matter more here than on a fully amortising loan, because almost nothing is being repaid. Raising the rate both raises the payment and slows principal reduction, so the balloon grows from both directions at once.

The outstanding balance can also be read off directly as the present value of the payments you have not yet made. That is the same number computed from the other end, and it is a useful way to check your arithmetic.

Some balloon structures include a balloon note with a reset option, letting the borrower extend at a new rate if certain conditions are met. Those conditions are a contractual matter, not an arithmetic one, and they belong in the loan documents rather than in any calculator.

For the example used throughout this page, 250,000 at 6 percent on a 30 year schedule with the balloon at month 60, the payment is 1,498.88, the balloon is 232,635.89, and the total paid across the life of the loan is 322,568.47.

That total is the number to compare against. A borrower who only looks at the monthly payment sees 1,498.88 and misses that 72,568.47 of interest has been paid for the privilege of retiring only 17,364.11 of principal.