How the 30/5 balloon structure works
A "30/5" balloon loan is two schedules stapled together. The payment is computed as if you had an ordinary 30-year loan — the same annuity arithmetic as ourmortgage calculator — so the monthly cost is genuinely low. But the loan itself matures at year five. Because a 30-year schedule retires principal very slowly in its early years (most of each payment is interest at first — see theamortization calculator for the month-by-month picture), the balance at year five is still close to the amount borrowed, and all of it comes due at once. That lump sum is the balloon. Some balloon loans go further and charge interest-only payments, in which case the balance never falls and the balloon equals the full principal — the structure ourinterest-only loan calculatorexplores from the other direction.
The formulas
PMT = P · i · (1 + i)ⁿ ÷ [(1 + i)ⁿ − 1]
B = P(1 + i)ᵗ − PMT · [(1 + i)ᵗ − 1] ÷ i
where P is the loan amount, i the monthly rate (annual rate ÷ 12), n the number of payments in the full amortization schedule, and t the number of payments actually made before the balloon comes due. The first line is the standard annuity payment formula found in any time-value-of-money textbook (OpenStax's Principles of Finance derives it in its time-value-of-money chapters); the second is the future value of the balance — the loan grown at interest, minus the future value of the payments made. In the interest-only variant, PMT = P · i and B = P. At a 0% rate both collapse to straight division: PMT = P ÷ n and B = P − PMT · t.
Worked example
Take the default scenario above: $400,000 borrowed at 6.5% on a 30/5 balloon. The payment is sized over 30 years, but the loan matures at year 5:
| Step | Amount |
|---|---|
| Loan amount | $400,000 |
| Interest rate and structurea 30/5 balloon: payment sized over 30 years, balance due at year 5 | 6.5% |
| Monthly paymentthe standard annuity payment for a full 30-year amortization | $2,528.27/mo |
| Principal retired by year 560 payments totaling $151,696, of which $126,140 is interest | $25,556 |
| = Balloon payment due at year 5the remaining balance — refinance it, pay it off, or sell before it comes due | $374,444 |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then swap in your own loan terms.
Who uses balloon loans — and the refinance risk
Balloon structures are the workhorse of commercial real estate lending: a bank will happily quote a payment on a 25- or 30-year amortization but commit its rate for only five, seven, or ten years, because it does not want to hold a fixed rate for three decades. They are also common in seller financing, where the seller of a property or small business carries the loan personally and wants full payoff within a few years, and in some auto and small-business lending. In US consumer mortgages they are deliberately rare — ability-to-repay rules generally keep balloon features out of qualified mortgages.
The defining risk is that the exit plan is someone else's decision. Nearly every balloon borrower intends to refinance before maturity, which quietly assumes three things hold at year five: interest rates are tolerable, the property still appraises well, and the borrower still qualifies. Any one of them failing can turn a routine refinance into a forced sale — and in a credit crunch, all three tend to fail together, which is exactly what happened to many commercial borrowers in 2008-09 and again as rates jumped in 2022-23. A balloon loan is a bet that the future refinancing market will be friendly; the low monthly payment is what you are paid for taking that bet.
Frequently asked questions
What is a balloon loan?
A balloon loan charges monthly payments sized as if the loan would run a long amortization schedule — commonly 30 years — but the loan actually matures much sooner, often at year five or seven. At that maturity date the entire remaining balance comes due in one lump sum: the balloon payment. Because early payments on a long schedule are mostly interest, the balloon is typically only slightly smaller than the original loan. Borrowers get lower monthly payments than a short-term loan would demand, in exchange for owing a large sum on a fixed date.
How is a balloon loan payment calculated?
The monthly payment uses the standard amortization (annuity) formula over the full amortization period, exactly as if the loan ran to the end: PMT = P·i·(1+i)ⁿ ÷ ((1+i)ⁿ − 1), where P is the principal, i the monthly rate, and n the total number of scheduled payments. The balloon is then the balance remaining after the payments actually made: B = P(1+i)ᵗ − PMT·((1+i)ᵗ − 1) ÷ i, with t the number of months until maturity. In the interest-only variant, the payment is simply P·i and the balloon is the full principal.
What happens when the balloon payment comes due?
You have three realistic options: pay the balance in cash, refinance it into a new loan, or sell the asset and retire the debt from the proceeds. Most borrowers plan to refinance — which is where the risk lives. If rates have risen, the new loan will be more expensive; if the property has lost value or your credit or income has weakened, a lender may decline to refinance at all. Borrowers who cannot pay, refinance, or sell face default, so a concrete exit plan matters more with a balloon loan than with any fully amortizing loan.
How is a balloon loan different from an interest-only loan?
They overlap but are not the same. A standard balloon loan amortizes slowly — each payment retires a little principal, so the balance drifts down before the lump sum comes due. A typical interest-only loan keeps the balance frozen during its interest-only window, then converts to a fully amortizing payment for the remaining term, with no lump sum. The two combine in an interest-only balloon: payments cover interest alone and the entire original principal is due at maturity, the most demanding structure of the three.
Why do lenders offer balloon loans?
Balloon structures let lenders commit to a rate for only five or seven years while quoting a payment based on a 30-year schedule, so they carry far less interest-rate risk than a true 30-year fixed loan. That is why they dominate commercial real estate lending, where 5- and 10-year balloons on 25- or 30-year amortizations are the norm. They also suit seller financing, where an individual seller wants monthly income now but full payoff within a few years. For consumer mortgages, US ability-to-repay rules generally exclude balloon features from qualified mortgages, so they are rare outside small or specialized lenders.
Sources
- Consumer Financial Protection Bureau, Ask CFPB — see "What is a balloon payment?"
- OpenStax, Principles of Finance — time value of money and annuity chapters
The official figures this page quotes are drawn from the primary sources above — check them (or a qualified professional) before relying on a result.
Disclaimer: This calculator is foreducation and illustration only. It assumes a fixed rate, level monthly payments, and no fees, prepayments, or rate resets; real balloon notes vary in all of these, and refinancing at maturity is never guaranteed. The figures it produces are not an offer of credit, and nothing here is financial, lending, or investment advice.