Loan Officer Practice Exam 2026 – Comprehensive All-in-One Guide for Exam Success!

The term "balloon payment" refers specifically to a large final payment that is due at the end of a loan term, particularly in the context of certain mortgage loans. This occurs when the borrower makes smaller monthly payments for a set period, often based on a longer amortization schedule, but the remaining balance becomes due in one lump sum at the end of the borrowing period.

This structure can make loans more affordable initially, as the monthly payments are lower. However, the borrower must be prepared for the significant final payment, which can sometimes lead to challenges if they have not planned for it adequately, since it can be substantially larger than the regular payments made throughout the loan term. Recognizing what a balloon payment entails helps borrowers understand the potential risks associated with such loan products. The other options do not accurately depict the concept of a balloon payment, as they focus on different aspects of loan repayment structures.