Certified Residential Appraiser Practice Exam

What characterizes a balloon payment in a mortgage?

1. Consistent payment schedule

2. A final larger payment than regular installments

3. A payment plan with no interest

4. Equal payments throughout the term

The correct answer is: A final larger payment than regular installments

A balloon payment in a mortgage is characterized by a final larger payment than regular installments. This payment typically occurs at the end of a loan term and is significantly larger than the previous scheduled payments, which are often smaller and designed to cover only interest or a portion of the principal. Balloon payments are commonly associated with loans that have a short term, while the amortization period may be longer. This means that the borrower pays smaller monthly amounts (often interest-only) throughout the life of the loan, leading to a large lump sum due at the end. This structure allows for lower monthly payments initially, but borrowers must be prepared to make a sizable final payment that can sometimes catch them off guard if they have not planned for it. Considering the other options, a consistent payment schedule would be typical of fully amortizing loans where payments are equal throughout, while a payment plan with no interest does not align with mortgage characteristics. Additionally, equal payments throughout the term would also relate to standard amortization rather than the inherent nature of balloon payments.