Which of the following is a characteristic of a balloon mortgage?

Which of the following is a characteristic of a balloon mortgage?

• A. It fully amortizes over the term
• B. It does not fully amortize and ends with a large balloon payment
• C. It requires constant monthly payments for full amortization
• D. It cannot have a term longer than 15 years

Answer: (B)

A balloon mortgage is defined by not fully paying off the loan by the end of its term. The payments are set as if the loan will be repaid over a longer period, so during the term you’re mainly paying interest or small amounts of principal. When the term ends, a large remaining balance—the balloon payment—comes due unless you refinance or pay it off in another way. This setup lowers ongoing payments compared to a fully amortizing loan, but creates a big lump-sum obligation at maturity. This is why the statement describing a loan that does not fully amortize and ends with a large balloon payment is the correct characteristic. The other descriptions describe loans that are fully amortizing, with payments that completely pay off the loan over the term, or impose a constraint (like a 15-year maximum) that doesn’t define balloon loans.

A balloon mortgage is defined by not fully paying off the loan by the end of its term. The payments are set as if the loan will be repaid over a longer period, so during the term you’re mainly paying interest or small amounts of principal. When the term ends, a large remaining balance—the balloon payment—comes due unless you refinance or pay it off in another way. This setup lowers ongoing payments compared to a fully amortizing loan, but creates a big lump-sum obligation at maturity.

This is why the statement describing a loan that does not fully amortize and ends with a large balloon payment is the correct characteristic. The other descriptions describe loans that are fully amortizing, with payments that completely pay off the loan over the term, or impose a constraint (like a 15-year maximum) that doesn’t define balloon loans.