Balloon Payments Explained – What You Need to Know for Your Mortgage

September 30, 20236 min read
Balloon Payments Explained – What You Need to Know for Your Mortgage
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • If someone has a mortgage that includes a balloon payment, their final payment will be larger than the monthly payments leading up to it.
  • The balloon payment is also fairly common in commercial lending, permitting such a lender to keep short-term expenses down and cover the balloon payment with future earnings.
  • Individual homebuyers who have a balloon loan generally seek to keep their near-term costs reduced while presuming that their income will have risen by the time the balloon payment is due.

Investors in real estate and those seeking to enter the market would do well to understand “balloon payment,” since it holds potential for mortgage refinancing as well as lower monthly payments – pending eligibility. 

But what exactly are balloon payments? Here is what needs to be known.

What is a Balloon Payment?

A balloon payment is one that is larger than usual – it “balloons” — at the loan term’s end. In other words, if someone has a mortgage that includes a balloon payment, their final payment will be larger than the monthly payments leading up to it. This arrangement is called a balloon loan. 

Payments made before the final one may be all, or nearly all, loan interest, with the balloon payment being the loan principal. 

Note that while the focus here is on mortgages and real estate, a balloon debt structure can be used for any debt type, including auto and business loans.

Why Would Someone opt for a Balloon Payment?

After the 2007-2008 financial crisis, the balloon loan was more often used with business loans. Such a loan can be used to finance a project, providing the borrower with relatively low payments early on. The balloon payment is not due until the project is generating returns on the investment.   

The balloon payment is also fairly common in commercial lending, permitting lenders to keep short-term expenses down and cover the balloon payment with future earnings. 

Likewise, individual homebuyers who have a balloon loan generally seek to keep their near-term costs reduced while presuming that their income will have risen by the time the balloon payment is due. Or they are assuming that they can sell the property and repay the whole mortgage before the balloon payment is due.

How Long is the Loan Term in a Balloon Payment?

Whereas traditional mortgages are for 15 or 30 years, balloon mortgage lenders favor terms of five to 10 years. Why? Because banks generally do not wish to wait until the last payment over so many years to recoup their money.

Who Can Receive a Balloon Payment?

Not everyone is afforded the opportunity to enjoy interest-only payments throughout most of the loan’s life. In fact, such mortgages are generally only available to high-net-worth investors and homebuyers who can, if necessary, handle a higher down payment. Most individuals who seek this type of mortgage also have high credit worthiness and usually plan to refinance before it is time to make the balloon payment.   

Advantages of Balloon Payments

There are advantages to balloon payments, namely the low initial payments, which are generally less than a fully amortized loan payment. The expectation is that as the borrower’s salary goes up, their debt load will also increase.

Securing a balloon loan may also mean fewer transaction fees or administrative costs relative to other loans, because of a shorter underwriting process. Also, because balloon mortgages frequently do not require a home appraisal, borrowers generally do not have to provide as much documentation.  Moreover, the balloon payment can be paid by refinancing the loan — if the borrower meets lender requirements regarding credit and income.

Those who “flip” houses – buy properties to renovate and quickly sell them – often seek such loans because of the lower earlier monthly payments. This permits them to have resources for other purposes.

Regarding risks, balloon payments can become problematic in a declining housing market (which the U.S. is not currently in). As home prices fall, it may be challenging for homeowners to be able to sell their property for a high enough price to cover the balloon payment – if they can sell at any price in time.

This means that home flippers could wind up being locked into a high-interest rate loan if sales become stagnant.

If they have a looming balloon payment they cannot afford, borrowers are sometimes forced to default on their loans and go into foreclosure, which results in the loss of the home.

Also, depending on the amount of paid-off equity one has, balloon mortgages may be challenging to refinance. Because these loans may only pay interest initially, the homeowner may have little equity in the property – if at all – despite making consistent payments over the years.  

In addition, balloon mortgages are generally harder to qualify for, as deferred principal payments cause lenders to seek out borrowers with a high down payment or high credit score. A higher risk for lenders usually means higher interest rates for balloon debt. 

Balloon Payments vs. Other Loan Structures

There are differences between balloon payments and other common loan structures. Balloon mortgages are short-term loans that start with a series of fixed monthly payments over several years and conclude with a final, lump-sum payment that is frequently at least twice as much as the previous ones.

In a traditional interest-only loan structure, the borrower only makes payments toward the interest. This means the borrower is not repaying the loan principal – the money that was borrowed.

With a traditional amortizing loan, the borrower must pay periodic fixed payments that are applied to the principal as well as interest until the loan is wholly repaid. At the start of the loan, the borrower can expect to put out more in interest than in principal. Toward the end of the loan, that reverses. 

Using a Balloon Payment to Invest in Real Estate 

Investors may encounter a balloon payment structure as a financing option when putting capital in real estate, which remains popular for its many benefits, that can include protection against inflation and portfolio volatility, as well as possible steady cash flow, leverage, tax favorability and income streams. 

If investors have a thorough understanding of what balloon payments are, and how they can be used to their benefit, they may be able to invest in some of Yieldstreet’s accessible real estate offerings. The leading platform for “alternative” investments – those other than stocks and bonds – has offerings that include private as well as commercial real estate opportunities – plus a Growth & Income real estate investment trust.  

After all, adding real estate to one’s portfolio can diversify investor holdings, which can mitigate overall portfolio risk. Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Invest in Real Estate

Unlock the potential of private real estate markets.

Alternative Investments and Portfolio Diversification

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

While there are considerations, and one must qualify, securing a balloon loan can lower one’s monthly payments leading up to the final one, the savings of which can be used to further invest.  It also can potentially facilitate mortgage refinancing.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure