Definition:
A balloon mortgage is a loan featuring regular monthly payments for a specific period, followed by one large final payment (the “balloon” payment) to pay off the remaining balance.

Example:
Suppose Emma gets a balloon mortgage to buy a house. She makes lower monthly payments for five years. At the end of the fifth year, however, she owes a significant balloon payment—often tens or even hundreds of thousands of dollars—to fully pay off the remaining loan balance.

Explanation:
In real estate, balloon mortgages offer lower initial monthly payments because they're typically calculated as if the loan lasts for 20–30 years, even though the actual term is shorter (commonly 5–7 years). After that short term, the borrower must pay the remaining loan balance in one large payment or refinance the loan.

Balloon mortgages might appeal to borrowers expecting to sell or refinance the property before the large payment is due. They're often used by investors or homeowners anticipating increased income, a home sale, or refinancing later. However, balloon mortgages carry significant risk if borrowers cannot make the large final payment or secure refinancing.

Importance:
Balloon mortgages matter because, while initial payments may seem affordable, borrowers face the risk of being unable to pay the final lump sum. Buyers must carefully plan for refinancing or ensure they'll have sufficient funds when the balloon payment comes due. For sellers, understanding balloon mortgages can affect how easily buyers obtain financing, potentially influencing negotiations and sales timelines.

In short, balloon mortgages can be advantageous for buyers with clear financial plans but require careful consideration due to the substantial financial obligation they create at the loan’s end.