What is a balloon mortgage?

A balloon mortgage is characterized by having fixed monthly payments for a set period, typically ranging from five to seven years, followed by a large final payment, which is considerably larger than the preceding installments. This structure allows borrowers to benefit from lower initial payments during the loan term, making it attractive for those who anticipate selling or refinancing before the balloon payment comes due.

The final payment, often referred to as the "balloon" payment, is the significant factor that distinguishes this type of mortgage from others. While the monthly payments are manageable, the borrower must be prepared for the larger payment at the end, which can be a financial strain if not anticipated or planned for. Understanding this structure is crucial in personal finance as it impacts budgeting and long-term financial planning.

Other types of loans described in the options lack this defining characteristic of a balloon payment. Loans with fixed interest rates for the entire term do not have a large final payment, while adjustable-rate mortgages change payments based on interest fluctuations. Lastly, the option discussing early repayment without penalties refers to a feature seen in some mortgages but does not capture the essence of what constitutes a balloon mortgage. Thus, the correct answer highlights the unique structure of balloon mortgages in personal finance.