What is a balloon mortgage?

A balloon mortgage is a type of loan characterized by having smaller periodic payments throughout most of its term, followed by a large final payment, often called a "balloon payment," at the end of the loan period. This structure allows borrowers to enjoy lower monthly payments in the earlier years of the loan, but they must be prepared for the significant amount due when the balloon payment is reached.

In contrast, other types of loans, such as fixed-rate mortgages, maintain consistent monthly payments throughout the loan's duration, and government-backed loans often fit specific criteria that don't specifically describe the unique features of a balloon mortgage. Therefore, the defining characteristic of the balloon mortgage—its requirement for a substantial final payment after a series of smaller payments—makes it the correct answer in this context.