What does a balloon mortgage require at the end of the mortgage term?

A balloon mortgage is a loan that typically provides lower monthly payments for a specific period, after which a large payment is due at the end of the loan term. This structure results in a significant lump sum payment that covers the remaining balance of the principal. The initial monthly payments often consist mostly of interest, allowing the borrower to pay less each month until the end of the term when the total outstanding balance, or "balloon," must be paid in full.

This feature makes balloon mortgages appealing to some borrowers; however, it requires careful consideration since the large final payment can be a financial challenge if the borrower is not prepared for it. Thus, at the end of the mortgage term, a balloon mortgage necessitates this lump sum payment of the remaining balance, making it essential for borrowers to plan strategically for that financial obligation.