What is a balloon mortgage?

A balloon mortgage is characterized by having lower initial payments which are typically interest-only or a partially amortized payment structure for a specific period, followed by a large final payment, known as the "balloon payment," at the end of the loan term. This structure can make the mortgage more affordable in the early years, attracting borrowers who may anticipate an increase in income or prefer to refinance before the balloon payment comes due.

This type of mortgage is often utilized in situations where buyers expect to sell the property or refinance before the end of the balloon period, thus avoiding the large final payment. Balloon mortgages can be advantageous for borrowers who plan their finances effectively and have an exit strategy for when the larger payment is due. Understanding this unique financial product is important for real estate professionals, as it allows them to better advise clients on financing options that align with their financial goals and situations.