What is a balloon mortgage?

A balloon mortgage is characterized by a structure where the borrower makes smaller, regular payments for a certain period, but at the end of that period, a significantly larger final payment is due. This final payment, known as the "balloon payment," includes the remaining balance of the loan. It differentiates itself from other mortgage types by this feature, as it does not fully amortize over the term of the loan. Instead, the early payments are typically lower, but the borrower must prepare for the larger sum at maturity, which can be a crucial point of consideration when assessing loan options. This structure can be attractive for those who anticipate selling or refinancing the property before the balloon payment comes due, but it can also pose risks if they are not prepared for the large financial obligation.