What is a balloon payment?

A balloon payment refers to a final lump-sum payment due at the end of a loan's term, after a series of smaller periodic payments have been made. This structure is often used in certain types of loans, such as balloon mortgages, where the borrower may pay lower monthly payments for a set period and then must pay off the remaining balance all at once at the end.

This payment structure can provide flexibility in the short term, allowing borrowers to manage their cash flow more effectively during the initial loan period. However, it is important for borrowers to plan ahead for this significant expense, as failing to make the balloon payment could lead to default or foreclosure.

The other options do not accurately describe a balloon payment. Monthly payments throughout the loan term typically refer to standard amortization structures. A type of mortgage with no penalties does not relate to the concept of a balloon payment and instead focuses on prepayment terms. Lastly, a payment that gradually increases over time describes a different loan structure, often referred to as a graduated payment mortgage.