What is a "balloon mortgage"?

A balloon mortgage is characterized by a payment structure where the borrower makes relatively small payments over a specified term and then is required to pay a much larger final payment, known as the "balloon" payment, at the end of the term. This arrangement can make initial monthly payments more manageable for the borrower, as they are only paying down a portion of the principal and interest for a set period. However, the large final payment can pose challenges if the borrower is unprepared for it or if they have not arranged for refinancing or the sale of the property by that time.

While other types of loans, such as interest-only loans, involve different payment structures, they do not feature the significant final payment characteristic of balloon mortgages. Similarly, mortgages without prepayment penalties and loans secured by multiple properties refer to entirely different aspects of mortgage agreements and do not capture the essence of the balloon payment concept.