Balloon Payment

What is a Balloon Payment?

A Balloon Payment is a large, lump-sum payment due at the end of a balloon loan. Unlike standard loans where the balance is fully paid off through regular installments over the loan's term, a balloon loan features lower periodic payments calculated over a longer amortization period, but the loan matures much earlier.

For instance, a loan might be amortized over 30 years to keep the monthly payment low, but the entire remaining principal balance (the "balloon") is due after just 5 or 7 years. Borrowers typically plan to refinance the loan, sell the underlying asset, or pay off the lump sum when it becomes due.

The Balloon Payment Formula

The periodic payment of a balloon loan is first calculated using the standard amortization formula. The remaining balance (balloon payment) at the end of the term is the future value of the loan.

1. Periodic Payment Formula

\[ \text{Payment} = P \times \frac{r(1+r)^N}{(1+r)^N - 1} \]

Where:

• P: Original loan amount (Principal)
• r: Periodic interest rate (annual interest rate / payments per year)
• N: Total number of amortization periods (years $\times$ payments per year)

2. Remaining Balance (Balloon) Formula

\[ \text{Balloon Payment} = P(1+r)^K - \text{Payment} \times \left( \frac{(1+r)^K - 1}{r} \right) \]

Where:

• K: Number of actual payments made before the balloon is due (balloon term in years $\times$ payments per year)