What is a balloon mortgage?

A balloon mortgage is characterized by its structure of smaller regular payments that do not fully amortize the loan, culminating in a significant final payment at the end of the loan term. The majority of the payments throughout the loan's duration typically cover interest or a small portion of the principal, resulting in a remaining balance that is quite large when the term ends. This large final payment is known as the "balloon" payment, hence the name.

This type of mortgage can be appealing for certain borrowers who expect to either refinance, sell, or otherwise address the final payment before it becomes due. Understanding this structure is crucial for borrowers to effectively manage their financial planning and obligations associated with such loans. Other choices describe different mortgage types or features that do not capture the essence of a balloon mortgage, making them less applicable in this context.