What is the purpose of a balloon payment in a mortgage loan?

A balloon payment is a significant payment due at the end of a loan term that is larger than all previous payments. In the context of a mortgage loan, the purpose of a balloon payment is to pay off the remainder of the loan at the end of the term. This structure is often found in loans that have lower monthly payments throughout the loan's life, with the expectation that the borrower will make a final lump sum payment to settle the remaining balance.

This type of loan structure can be attractive to borrowers who may anticipate selling the property or refinancing before the balloon payment comes due, allowing them to benefit from lower payments in the interim. The use of a balloon payment can also reflect a strategy to keep the monthly cash flow manageable while still providing a clear endpoint for the debt obligation.

Other options may touch upon different concepts in mortgage lending, such as reducing total interest through a shorter loan term or adjusting the interest rate. However, these do not align with the specific function of a balloon payment, which is primarily focused on eliminating the remaining balance at the end of the loan period.