A large, lump-sum final payment due at the end of a loan term that is not fully amortized.
Why Balloon Payment matters on the exam
This term belongs to Financing. The questions below are real items from Freehold's bank that use it - each one cites its source.
Exam questions using Balloon Payment
Every Freehold question shows why the right answer is right — and cites its source.
A fully amortized fixed-rate loan is characterized by:
Interest-only payments with a balloon payment at maturity
Payments that adjust annually with an index
Increasing payments that start below the interest owed
Equal periodic payments that retire the entire debt by the end of the term
Show answer & explanation
Equal periodic payments that retire the entire debt by the end of the term — A fully amortized loan is repaid through equal periodic payments covering both interest and principal, so the balance reaches zero at the end of the term with no balloon payment due.
Source: PSI National Real Estate Exam Content Outline §4 Financing
A loan that requires periodic payments based on a longer amortization schedule but becomes due in full after a shorter term is called a:
Fully amortized loan
Interest-only loan
Partially amortized (balloon) loan
Negatively amortized loan
Show answer & explanation
Partially amortized (balloon) loan — A partially amortized loan calculates payments as if repaid over a long term but requires the remaining balance to be paid in a lump-sum balloon payment at an earlier maturity date.
Source: PSI National Real Estate Exam Content Outline §4 Financing
Negative amortization occurs when:
The monthly payment is less than the interest due, causing the loan balance to increase
The monthly payment exceeds the interest due, thereby reducing the principal balance faster
The borrower makes an extra principal-only payment
The lender waives the final balloon payment
Show answer & explanation
The monthly payment is less than the interest due, causing the loan balance to increase — Negative amortization happens when payments are insufficient to cover accruing interest, so unpaid interest is added to the principal balance, causing the debt to grow instead of shrink.
Source: PSI National Real Estate Exam Content Outline §4 Financing
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