What is a balloon mortgage?

A balloon mortgage is characterized by its requirement for a large final payment at the end of the loan term. Typically, throughout the term of the mortgage, the borrower may make smaller monthly payments that are often lower than those of a fully amortized loan, leading to a situation where the borrower has not paid off the entire principal balance.

The culmination of this structure results in a significant payment at the conclusion of the mortgage period, known as the balloon payment. This payment represents the remainder of the principal that has not been amortized over the earlier payment schedule. This type of mortgage can be advantageous for those who expect to sell or refinance before the balloon payment is due, but it does carry the risk of requiring a large sum to be paid at once if other arrangements have not been made.

In contrast, some other types of mortgages typically have fixed monthly payments, require interest-only payments, or adjust based on market conditions. These structures are more predictable in terms of monthly budgets, but they do not incorporate the same final payment structure that defines a balloon mortgage.