What is a "balloon mortgage"?

A "balloon mortgage" is characterized by its structure, in which the borrower makes relatively low monthly payments for a set period, followed by a substantial final payment that covers the remaining balance of the loan. This arrangement contrasts with traditional fixed-rate mortgages, where payments are consistent and spread out evenly over the life of the loan.

The appeal of a balloon mortgage often lies in the initial lower monthly payment, which can make it an attractive option for borrowers who anticipate being able to refinance or sell the property before the balloon payment is due. However, it also carries a risk because the large final payment can catch some borrowers off guard if they are not prepared for it. Understanding this aspect is crucial for borrowers when considering their long-term financial plans.

The other options represent different mortgage structures that do not share the same defining characteristics as a balloon mortgage. For instance, adjustable-rate mortgages fluctuate based on market conditions rather than featuring a significant final payment. Meanwhile, loans with co-signers and those that can be refinanced at any time pertain to different lending terms unrelated to the specific payment structure of a balloon mortgage.