What is a balloon payment loan?

A balloon payment loan has lower regular monthly payments but requires a large lump-sum payment at the end of the loan term. For example, a 7-year balloon mortgage might calculate payments based on a 30-year amortization but require the remaining balance paid in full at year 7. Borrowers typically plan to sell the property or refinance before the balloon comes due. These loans often have lower interest rates than fully amortized loans, making them attractive for investors or buyers who plan to move. The risk is that if property values drop or rates rise, refinancing before the balloon date may not be possible.