What is a common consequence of a balloon payment on a loan?

A balloon payment is a large final payment that is due at the end of a loan term, typically after a series of smaller, regular payments. This payment is often significantly larger than the preceding payments and is designed to pay off the remaining balance of the loan in one lump sum.

The concept of a balloon payment usually involves loans with terms that initially require lower monthly payments, making the arrangement attractive to borrowers, but the eventual large payment can pose a financial challenge if the borrower does not prepare for it adequately. This can lead to situations where the borrower may need to refinance, sell the property, or face difficulties in fulfilling this requirement.

While lower monthly payments can be a part of such loans before the balloon payment is due, it is the significant final payment that characterizes the balloon payment structure itself, making this feature critical for understanding the implications of such loans in real estate transactions.