What does a balloon payment refer to in mortgage terms?

A balloon payment refers to a final payment that significantly exceeds previous payments. This type of payment structure is commonly used in certain types of loans, such as balloon mortgages, where monthly payments are lower for most of the loan term and then culminate in a larger final payment.

This arrangement can lead to lower initial monthly payments, making it more affordable for borrowers in the early stages. However, borrowers should be aware of the significant final payment due at the end of the loan term, as this can pose a financial challenge if they aren't prepared for it or haven't planned accordingly for the payoff. Understanding this aspect of financing is crucial for anyone involved in real estate transactions, as it directly relates to managing debt and overall financial planning in real estate investments.