A balloon mortgage is a mortgage whose payments are not large enough to pay off the entire mortage during its amortization period. Thus, the borrower must make an extra-large payment at the end of the amortization period to fully pay off the loan. For example, a balloon mortgage on a home might have a $500 month normal mortgage payment, and require a final payment of $2,000.
Balloon mortgages are most commonly used for commercial mortgages. Sometimes, commercial developers take out a balloon mortgage, planning to refinance later with a traditional mortgage. This strategy can put the developer in a very bad position if they are unable to refinance. This problem is increasingly frequent due to the recent economic turmoil.