What is the term for a final payment that is larger than the monthly payments because the loan was not fully amortized?

What is the term for a final payment that is larger than the monthly payments because the loan was not fully amortized?

• A. Interest-only loan
• B. Balloon mortgage
• C. Adjustable-rate mortgage
• D. Fully amortized loan

Answer: (B)

A balloon mortgage is structured so the regular payments don’t fully pay off the loan by the end of the term. The borrower makes smaller monthly payments that cover interest and some principal, but a large lump-sum payment remains at the end to retire the loan. This creates a final payment that’s much larger than the ongoing payments because the loan was not fully amortized over the term. This differs from a fully amortized loan, where each payment reduces the balance so it’s paid off by the end; an adjustable-rate mortgage changes payment amounts over time but is still typically fully amortized unless it’s specifically a balloon loan; and an interest-only loan requires payments that cover only interest during the initial period, with principal due later, which can also lead to a large final payment but is described by the interest-only structure rather than the balloon feature.

A balloon mortgage is structured so the regular payments don’t fully pay off the loan by the end of the term. The borrower makes smaller monthly payments that cover interest and some principal, but a large lump-sum payment remains at the end to retire the loan. This creates a final payment that’s much larger than the ongoing payments because the loan was not fully amortized over the term.

This differs from a fully amortized loan, where each payment reduces the balance so it’s paid off by the end; an adjustable-rate mortgage changes payment amounts over time but is still typically fully amortized unless it’s specifically a balloon loan; and an interest-only loan requires payments that cover only interest during the initial period, with principal due later, which can also lead to a large final payment but is described by the interest-only structure rather than the balloon feature.