Last reviewed: 3 October 2026
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Interest-only, balloon and negative-amortization loan features, explained
Three loan features can change what you owe or when you pay it. This page sets out what the CFPB says about each one, and what Regulation Z says about them in qualified mortgages.
What this term means: Amortization means paying off a loan with regular payments. The CFPB says that with amortization the amount you owe goes down with each payment.[3] A qualified mortgage is a loan that meets extra standards in Regulation Z; our ability-to-repay guide explains the label.
The three features, as the CFPB describes them
| Feature | What the CFPB says it is | What the CFPB says to keep in mind |
|---|---|---|
| Interest-only | Scheduled payments require you to pay only the interest for a specified amount of time, and the amount you owe does not go down with each payment.[1] | The CFPB says not to assume you will be able to sell or refinance if your payment increases, because the property’s value could decline or your finances could change.[1] |
| Balloon payment | A balloon payment is a large, one-time payment at the end of the loan term. The loan’s payments may be lower in the years before it is due.[2] | The CFPB says a balloon mortgage can be risky because you owe a larger payment at the end, and that if you cannot make it you could lose your home.[2] |
| Negative amortization | Your minimum payment does not cover the interest you owe, so the unpaid interest is added to the amount you borrowed and the amount you owe increases.[3] | The CFPB says this can be risky because you can end up owing more than your home is worth, which makes it harder to sell.[3] |
What happens when the interest-only period ends
The CFPB says that when the interest-only period ends you may have several options: paying off the balance all at once, refinancing if refinancing is available, or beginning to pay the balance off in monthly payments, which are higher than the interest-only payments.[1]
More detail on balloon and negative-amortization loans
- The CFPB says loans with balloon payments generally have shorter terms than traditional mortgages, between 5 and 10 years compared with 15 to 30 years.[2]
- It says a balloon payment is generally more than two times the loan’s average monthly payment and can often be a significant portion of the entire loan amount.[2]
- It says you may be able to refinance before the balloon is due, but if the property’s value falls or your finances decline you might not be able to.[2]
- On negative amortization, it says that after a period of time you usually have to start making payments that cover principal and interest, and these payments are higher.[3]
- It also warns that paying only part of the interest can add the unpaid part to your principal, so you pay interest on interest.[3]
How Regulation Z treats the three features
Under § 1026.43(e)(2)(i), the general qualified mortgage provides for regular periodic payments that are substantially equal, except for the effect of interest-rate changes on an adjustable-rate or step-rate loan, and that do not increase the principal balance, allow you to defer repayment of principal, or result in a balloon payment, except as paragraph (f) provides.[4]
| Feature | General qualified mortgage, § 1026.43(e)(2) |
|---|---|
| Interest-only | Payments may not allow you to defer repayment of principal, except as paragraph (f) provides.[4] |
| Balloon payment | Payments may not result in a balloon payment, except as paragraph (f) provides.[4] |
| Negative amortization | Payments may not result in an increase of the principal balance.[4] |
The CFPB’s balloon page says balloon payments are not allowed in a qualified mortgage, with some limited exceptions.[2]
Paragraph (f) allows a balloon-payment qualified mortgage only if several conditions are met, including scheduled payments that are substantially equal and calculated on an amortization period of no more than 30 years, an interest rate that does not increase over the term, and a loan term of five years or longer.[4] Paragraph (f) also requires the lender to meet the requirements stated in § 1026.35(b)(2)(iii)(A), (B) and (C). This page does not walk through those.[4]
How the repayment check treats these loans
For any covered loan, the lender must consider your monthly payment, and the regulation sets special ways to calculate that payment for a balloon, interest-only or negative-amortization loan.[4]
- For a balloon loan that is not a higher-priced covered transaction, the lender uses the maximum payment scheduled during the first five years after the first regular payment is due. For a higher-priced covered transaction, it uses the maximum payment in the payment schedule, including the balloon payment.[4]
- For an interest-only loan, the lender uses the fully indexed rate or any introductory rate, whichever is greater, and substantially equal monthly payments of principal and interest that repay the loan amount over the term remaining when the loan is recast.[4]
- For a negative-amortization loan, it uses the same rate rule and payments that repay the maximum loan amount over the term remaining when the loan is recast.[4]
“Higher-priced covered transaction” is a defined term in the regulation. Our reading, not a quotation: for interest-only and negative-amortization loans, and for a balloon loan that is a higher-priced covered transaction, these rules mean the lender’s test uses a later, larger payment, not only the early payment. Non-qualified mortgages are covered in our non-QM guide.
How to verify this yourself
Open the four sources in the reference list. Check the loan terms in your own Loan Estimate and Closing Disclosure, which show how payments can change; our guide to reading the Loan Estimate shows where. In the regulation, read § 1026.43(c)(5)(ii) for the payment calculations and (e)(2)(i) and (f) for the qualified mortgage terms. A HUD-approved housing counselor can explain a loan offer for free; see how to find one. Our published standard and the Register cover how we check loan originators, not loan products.
What this page does not cover
This page is general information, not legal advice or a view on any loan. It does not say whether any of these features suits anyone. It does not cover reverse mortgages or home equity lines of credit, which the regulation treats separately, or the small-creditor conditions behind paragraph (f). The balloon page was last reviewed 28 August 2026 and the other two CFPB pages 11 September 2024. This page was last reviewed 3 October 2026.
Your next step
If a loan offer has one of these features, find the line in your Loan Estimate that shows when and how your payment can change, and ask the lender to explain it in writing. Then return to the Mortgage help library.