The balloon mortgage is a fairly simple concept. The term "balloon" refers to a balance at the end of the term that must be repaid. On a typical 5 year balloon, loan payments would be calculated just like they would if you were going to be paying off the loan completely over 30 years. After making payments for five years on the note the balance of the loan would be due in one lump sum. For example, assuming a rate of 6.5% interest, a $100,000 loan would have a balance remaining at the end of the fifth year of $93,611. Typically at the end of 5 years the balloon payment must be repaid by securing a new loan, and often you will pay some settlement costs in the process. For home buyers who plan to stay in their homes less than seven years, Balloon Mortgages may provide a lower cost fixed-rate financing alternative to 15- and 30-year Fixed Rate Mortgages .