What is the definition of a balloon mortgage?

A balloon mortgage is defined as a loan that requires a borrower to make smaller monthly payments for a certain period of time, followed by a very large final payment, known as a "balloon" payment. This type of mortgage typically features a shorter term, like 5 or 7 years, in which the borrower pays interest and part of the principal. At the end of this period, the remaining balance is due in a lump sum.

This structure can be appealing for borrowers who may expect to refinance or sell the property before the balloon payment comes due, but it can also involve significant financial risk if the borrower is unable to make the large payment at the end of the term or if conditions in the lending market have changed.

In contrast, an option that describes a mortgage with fixed monthly payments would characterize a standard fixed-rate mortgage, while a fully amortized mortgage means that payments are structured to pay off the loan completely by the end of its term. A mortgage that adjusts its rate periodically typically refers to an adjustable-rate mortgage (ARM), which behaves differently compared to a balloon mortgage.