What is a balloon payment in a mortgage?

A balloon payment in a mortgage refers to a large final payment due at the end of a loan term. This structure is common in certain types of loans where the borrower makes smaller periodic payments throughout the loan's duration, which typically cover only interest costs or a small portion of the principal. At the end of the loan term, the borrower is then faced with a substantial payment that represents the remaining balance on the loan. This is why the term "balloon" is used; the payment is significantly larger than the preceding payments, similar to a balloon that swells up. Such arrangements can be appealing due to lower initial payments but require careful financial planning to prepare for the larger final payment.