What is a balloon mortgage?

A balloon mortgage is characterized by a structure that requires small payments for a specified period, usually consisting of interest-only payments or partial principal payments, followed by a significantly larger final payment, known as the "balloon" payment. This large payment is due at the end of the loan term, which is typically shorter than that of traditional mortgages, often ranging from 5 to 7 years.

In contrast to other types of mortgages, like fixed-rate loans that distribute payments evenly over a longer duration, the balloon structure allows borrowers to manage smaller initial payments, which can be advantageous for certain financial strategies. However, borrowers must be prepared for the larger payment at the end, as failing to plan for this can lead to potential financial challenges.

Understanding this type of mortgage is crucial for mortgage loan originators, as they need to be able to explain the risks and benefits to potential clients.