What is a balloon payment in mortgage terms?

A balloon payment refers specifically to a large final payment that is due at the end of a loan term, particularly in the context of a partially amortized mortgage. In such loans, the borrower makes regular payments that only cover a portion of the loan's principal and interest during the loan's term. As a result, by the time the loan matures, the remaining balance (the "balloon") is significantly larger than the regular payments. This final payment can catch borrowers off guard if they are not prepared for it.

Understanding what a balloon payment entails is crucial for borrowers, as it affects both their financial planning and risk profile. It is essential for them to be aware of the repayment structure when entering into this type of loan, as the large payment due at the end could necessitate refinancing or selling the property unless they have the funds on hand to make that payment.