Balloon Payment
A large lump-sum payment due at the end of a loan term that pays off the remaining balance.
Definition
A balloon payment is a large, lump-sum payment due at the end of a loan's term — typically after 3, 5, 7, or 10 years — that covers the remaining principal balance. Loans with balloon payments often have lower interest rates or interest-only periods, then require the balance to be paid in full or refinanced.
Balloon loans are common in seller financing, private money loans, hard money loans, and commercial real estate. They provide lower payments during the hold period but require the investor to either sell the property, refinance, or have cash on hand when the balloon comes due.
The key risk: if the market drops or your credit situation changes by the balloon date, you may not be able to refinance on favorable terms. Always have a clear exit strategy before accepting a balloon loan — know how you'll pay it off when it comes due.
Related Terms
Hard Money Loan
Short-term, asset-based loans from private lenders — used for acquisitions and rehabs when speed matters.
Seller Financing
A transaction where the seller extends credit to the buyer, eliminating the need for a traditional bank loan.
Refinance
Replacing an existing loan with a new loan — often to access equity, lower the rate, or change loan terms.
Bridge Loan
Short-term financing that bridges the gap between purchasing a property and securing permanent financing.
Exit Strategy
The plan for how and when an investor will eventually sell or dispose of an investment property.