What is a balloon mortgage?

A balloon mortgage is characterized by its structure as a short-term loan that culminates in a large final payment, often referred to as the "balloon" payment. This type of mortgage typically has a shorter amortization period than the term of the loan itself. For instance, it may be set up to have a term of 5 or 7 years, but the payment calculations are based on a longer amortization schedule, such as 30 years. As a result, at the end of the term, the borrower must make a significant final payment to settle the outstanding balance of the loan.

The appeal of a balloon mortgage often lies in its initially lower monthly payments compared to traditional fixed-rate mortgages, making it attractive for buyers who may anticipate selling or refinancing before the balloon payment is due. The risk lies in the potential need to refinance or sell the property before facing that large payment, which can pose challenges if market conditions are unfavorable or if the borrower's financial situation changes.

The other options present different mortgage features that do not apply to the definition of a balloon mortgage. For example, interest-only payments involve paying only the interest for a specific period without reducing the principal, while loans for purchasing multiple properties do not align with the single property focus of balloon