Balloon Payment Mortgage

A balloon payment mortgage has monthly payments that do not pay off the loan by maturity, leaving a large final payment of the remaining balance. Balloons are common in commercial mortgages and some DSCR products, where the payment is set on a 25 or 30-year schedule but the loan comes due in 5, 7 or 10 years.

The monthly payment, and so the DSCR, looks the same as a fully amortizing loan on the same schedule. The difference is the date. On the site example, a 30-year payment with a five-year balloon leaves about $354,800 due at month 60. The borrower has to refinance or sell to pay it.

That makes the balloon a refinancing risk. A ratio that is comfortable today tells you nothing about whether a new lender will size a loan big enough to retire the balance in five years. Check what rate would still produce a qualifying ratio on the remaining balance before you accept a short maturity.

Further reading: Balloon Payment Mortgage on Wikipedia.