Can balloon payments be included in a high-cost mortgage?

What the Law Says

The Home Ownership and Equity Protection Act (HOEPA), as codified in 15 U.S.C. § 1639, imposes strict restrictions on high-cost mortgages — including an outright ban on balloon payments.

A 'high-cost mortgage' is defined under federal law as a consumer credit transaction secured by the consumer’s principal dwelling where either: (1) the annual percentage rate (APR) exceeds the average prime offer rate by more than 6.5 percentage points for first-lien loans (or 8.5 for subordinate-lien loans); or (2) total points and fees exceed the greater of 5% of the loan amount or a dollar threshold (e.g., $24,922 in 2024).

Once a loan qualifies as high-cost, several features are prohibited — including balloon payments, negative amortization, default interest rates higher than pre-default rates, and most prepayment penalties beyond 30 days.

The prohibition applies regardless of loan term or borrower consent. Even if a borrower agrees to a balloon payment in writing, it remains unlawful in a high-cost mortgage.

Statutory Text

A creditor may not extend a high-cost mortgage that includes a balloon payment.

— 15 U.S.C. § 1639(l)(1) — Prohibited terms

Statutory Text

The term 'high-cost mortgage' means a consumer credit transaction... in which the annual percentage rate... exceeds the average prime offer rate by more than 6.5 percentage points...

— 15 U.S.C. § 1602(aa)(1)(A) — Definition of high-cost mortgage

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