What is a balloon mortgage?

A balloon mortgage is characterized by its structure, which requires a large payment to be made at the end of the loan term. This type of mortgage typically features lower monthly payments throughout the duration of the loan, which can make it appealing to borrowers who may not want the higher payments associated with traditional mortgages. However, the significant final payment—often referred to as the "balloon payment"—can create challenges if the borrower is not prepared for it.

This type of mortgage is often used in scenarios where the borrower expects to sell the property or refinance the loan before the balloon payment comes due, allowing them to avoid the large payment altogether. Understanding this structure is crucial for borrowers to ensure they can meet the payment requirements when the time comes. The allure of lower monthly payments combined with the requirement of a substantial final payment is what distinguishes balloon mortgages from other mortgage types.