A balloon payment mortgage is loan which is amortized for a longer period than the term of the loan, therefore leaving a balance due at the maturity of the loan.

Usually this refers to a thirty year amortization and a five or seven year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.

For example on an 7 year ballon payment mortgage, the monthly payments is ussually calculated over a 30 year period. At the end of the 7th year the balance or balloon payment becomes due. it is either paid or the loan is refinanced with the same lender or another lender.

Balloon payment loans normally have lower interest rates similar to ARMs, but you are trading off a lower rate in the early years against the risk a higher interest rate later.