What is “Balloon Mortgage”?

Balloon Mortgage as the name suggests is a financing mechanism wherein the payments are not completely amortized during the loan term as the borrower at times only has to pay the interest on the loan and a huge sum at maturity i.e. the complete principal amount to bring the loan to a closure. It is because of this massive sum involved at the end that it is known as the balloon payment.

The balloon mortgage is similar to the normal loan apart from the fact that the borrower has to make a balloon payment after a certain amount of time for the loan to be closed. This is popular in commercial real estate. The borrower also refinances the balloon mortgage with a regular mortgage when the balloon payment is very high.