In the real estate industry, a balloon payment is a large lump sum payment due at the end of a loan term. This payment type is commonly found in loans with a lower monthly payment and a longer term, such as 30-year mortgages. Balloon payments are also sometimes used in commercial real estate loans or car loans.

Balloon payments are usually only required at the end of the loan term, which can be anywhere from 5 to 30 years. This means that the borrower will make smaller monthly payments over the course of the loan, with the understanding that a larger, final payment will be due at the end. The size of the balloon payment will depend on the terms of the loan, but it is typically a substantial amount.

While balloon payments can be attractive because they allow borrowers to make smaller monthly payments, they can also be risky. The borrower may be forced to refinance or sell the property if they are unable to make the balloon payment at the conclusion of the loan term. This can be challenging if property values have decreased or interest rates have risen.

In addition, balloon payments can also lead to negative amortization, which means that the borrower owes more than the original loan amount at the end of the loan term. This can occur if the loan's interest is not covered by the monthly payments, in which case the interest is added to the principal balance.

To mitigate the risks associated with balloon payments, borrowers should carefully consider the loan terms and develop a solid plan for making the balloon payment at the term's end. This may involve saving money over the course of the loan, refinancing, or selling the property. Additionally, borrowers may explore alternative loan options that do not require a balloon payment or that have a shorter term, such as a fixed-rate mortgage with a 15 or 20-year term. By weighing the pros and cons of different loan options and being proactive about planning for the future, borrowers can make informed decisions about their real estate financing needs.