Legal Definitions - balloon-payment mortgage

A balloon-payment mortgage is a type of loan, most commonly used for real estate, where the borrower makes relatively small, regular payments for an initial, specified period. At the end of this period, a significantly larger, single payment—known as the "balloon payment"—is required to pay off the entire remaining balance of the loan. This structure means that the loan is not fully paid off through the regular payments during the initial term.

Here are some examples to illustrate how a balloon-payment mortgage works:

• Commercial Property Development: A real estate developer secures a loan to purchase land for a new commercial complex. They obtain a 5-year balloon-payment mortgage, making interest-only payments for the first five years. The developer anticipates that by the end of this period, the complex will be built and sold, allowing them to use the proceeds from the sale to make the large balloon payment and fully repay the loan. This illustrates how the structure can provide short-term financing with lower initial payments, with the expectation of a future event (the sale) providing the funds for the final large payment.

• Residential Bridge Financing: A homeowner wants to purchase a new house before their current home has sold. They might use a 2-year balloon-payment mortgage as a bridge loan for the new property. For two years, they make minimal payments on the new mortgage, expecting that their old house will sell within that timeframe. Once the old house sells, they use the equity to make the substantial balloon payment, paying off the new mortgage in full. This demonstrates its use as a temporary financing solution, where a future lump sum is expected to clear the debt.

• Investment Property with Renovation: An investor buys a fixer-upper property with the plan to renovate it and resell it within three years for a profit. They opt for a 3-year balloon-payment mortgage, which keeps their monthly payments low during the renovation phase. They intend to pay off the entire outstanding loan balance with the proceeds from the quick sale of the improved property before the balloon payment due date. This highlights how the loan can be beneficial for short-term investment strategies where the property is not intended to be held long-term.