What characterizes a balloon mortgage in real estate finance?

A balloon mortgage is characterized specifically by a loan structure in which the borrower makes regular payments over a set period, but the principal balance remaining at the end of that period is significantly larger and must be paid off in one lump sum. This structure often leads to a large “balloon” payment at the end of the loan term, hence the name.

The regular payments throughout the loan term typically cover only the interest or a small portion of the principal; thus, while the borrower benefits from lower monthly payments, they must be prepared for the substantial payment when the loan matures. This aspect of the balloon mortgage can be appealing for those expecting to sell or refinance before the balloon payment comes due.

The other options do not accurately describe the nature of a balloon mortgage. For instance, a loan with no monthly payments until the end of the term would indicate a different structure, such as a deferred payment loan or interest-only loan. A fixed interest rate describes the interest rate feature rather than the payment structure, and a loan repaid in full within one year likely refers to a short-term loan, not one specifically involving balloon payment characteristics.