National and UST Mortgage 1 Practice Exam 2025 - Free Mortgage Practice Questions and Study Guide

A balloon mortgage is characterized by its repayment structure, which typically involves smaller monthly payments over the term of the loan. However, rather than paying off the entire loan balance through these regular payments, the borrower is required to make a single large payment at the end of the loan term. This final payment, known as the balloon payment, is significantly larger than the preceding regular payments and covers the remaining balance of the loan.

The primary reason for this structure is to provide lower monthly payments initially, making it appealing to borrowers who may not want to commit to higher monthly obligations. However, this feature also means that borrowers must be prepared to manage the cash flow necessary to meet this large payment when it comes due. It’s important for borrowers to understand the implications of this type of mortgage, particularly the potential challenges associated with making the large final payment if their financial situation does not allow for it.

Other answer choices do not accurately reflect the nature of a balloon mortgage. Smaller monthly payments or equal monthly payments throughout the term would not describe the unique payment structure of a balloon mortgage, and saying there's no final payment contradicts the fundamental definition of a balloon mortgage.