Definition
A balloon mortgage has low payments during the loan term but one huge final payment due at the end. You typically refinance that balloon payment rather than paying it in full. They're riskier than conventional mortgages and less common in residential lending.
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Balloon mortgages typically have 5, 7, or 10-year terms with interest-only or partially amortized payments, then the entire remaining balance is due. Borrowers typically refinance the balloon payment rather than paying it in full. These mortgages are riskier for borrowers and uncommon in residential lending.
Pro Tip
Avoid balloon mortgages unless you have a specific short-term strategy and confident plans to refinance or pay off the balloon.
Example
A balloon mortgage has $1,000 monthly payments for 7 years, then a $280,000 balloon payment due at the end; the borrower typically refinances at that point.