Balloon payment mortgage | Housing | Finance & Capital Markets | Khan Academy

ruticker 02.03.2025 23:23:34

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So, we already have some experience with traditional fixed-rate mortgages, but I'll give a little bit of a review before we talk about a little variation—or maybe you could say a big variation on it—which is a **balloon payment mortgage**. Right over here, what I've depicted are the different payments you would make on a **30-year fixed mortgage**. This one right over here is a **30-year fixed mortgage** where you have a fixed payment every month of **$1,432**, and the loan amount is **$300,000**. So, before you make your first payment, you owe the bank **$300,000**. You keep making these payments, and as we've seen in previous videos, your very first payment (you see in magenta here) is mostly interest. **$1,000** of that **$1,432** is interest. Then, for the next payment, you paid down the principal a little bit—not a lot. That maybe looks like it's about **$400** or something. Now, your next payment, **$999** of it is interest, and the next payment, **$997** is interest. You keep doing that for all **360 payments** (remember, **30 years times 12 months per year**). As you get to the end of your **30-year mortgage**, most of your payment is principal. So, on the two months before you've paid it off, that **358th payment** has only **$14** as interest. Then the next one has only almost **$9** or **$10** as interest, and then roughly **$5** is interest, and then you have paid off the entire loan. You have a fixed payment, and you also have a fixed interest rate. I haven't said what the interest rate is here for this mortgage, but then you pay it off over **30 years**—there's a **30-year amortization**. The word **amortization** means kind of spreading out something, so in this case, you're spreading out the payments over **30 years**. Now, given that, why am I giving this as the preface to a **balloon loan**? A **balloon payment mortgage**? Well, in a balloon payment, and this was a little bit confusing to me the first time I learned about it, the term is different than the amortization. For example, you could have a **10-year term balloon payment loan** that still amortizes over **30 years**. So, what do I mean by that? Well, in this situation, your payments could be exactly the same, but then after **10 years** (because it's a **10-year term**), you have the loan for **10 years**. After **10 years**, the loan is done. So, **10 years** is **120 months**. This is the **10 years** right over here—it's the first **120 months**. After **10 years**, you amortize it. Remember, this payment schedule that we set up is based on a **30-year amortization**, just as if we were doing a **30-year fixed-rate mortgage**. But in the balloon payment, if you had a **10-year term** with a **30-year amortization**, the payments are the same, but after the **10 years**, at the end of the loan, you don't just make that **120th payment**; you have to pay back whatever the principal is—whatever's left on the loan. So, we see that after **10 years**, what's left on the loan is **$236,300**. In a balloon payment, you pay—the loan lasts for **10 years**, even though the amortization—the rate at which you're paying down the principal, you're paying down the loan—is the same as for whatever the amortization schedule is, the **30-year amortization**. So, the question is, why does this thing exist? Well, in some ways, this is like we talked about in the **adjustable-rate mortgages**—it's spreading the interest rate risk between the bank and the lender. In a **30-year fixed loan**, all of the interest rate risk goes to the bank, while in an **adjustable-rate mortgage**, all of the interest rate risk goes to the borrower. Here, the bank is only guaranteed to take on interest rate risk for **10 years**. Then after that, they get the balance of the loan. You might say, what does the borrower do, or why would a borrower ever want to do this? Well, they might want to do this because maybe they get a slightly lower interest rate than with a **30-year mortgage**. They get to have the exact same payments, and they get a lower interest rate because the bank is taking on less interest rate risk. They have less risk if interest rates were to spike up, you know, **20 years** from now. A lot of people might say, "Well, I don't think I'm going to own this property for more than **10 years**." So, as long as I get a **10-year fixed payment**, then I'm good. At some point, if I sell the property in the **ninth year**, well then I just pay off the loan. Another possibility is that the person thinks they'll end up with a lot of cash for some reason—maybe they expect an inheritance, maybe they expect to earn more money. Or another possibility, if none of that happens, if after the **10th year** they say, "Hey, wait! I still want to continue paying this house down, and I don't plan on selling it, and I haven't come up with some windfall of cash to pay **$236,000**," then they can just take out another loan to borrow the **$236,000**. There's some risk involved there because you have to feel good that at that time you will still have a good credit history, and you'll still have the level of income necessary in order to get another mortgage. So, hopefully, this gives you a sense of what a **balloon payment mortgage** is. It's not anywhere near as typical as a **30-year fixed**, **15-year fixed**, or **10-year fixed**, or as common as an **adjustable** or **hybrid ARM**, but they do exist, so it's interesting to know about them.

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