Definition
A balloon payment is a large lump sum due at the end of a loan term whose regular monthly payments weren't structured to fully pay off the balance. Seller-financed deals and short-term loans often use this structure: smaller, more affordable payments for a set number of years, followed by the remaining balance coming due all at once. The borrower is generally expected to refinance or sell the property before that date arrives. For a seller carrying financing, a balloon payment gives you a defined date to be fully cashed out rather than collecting payments indefinitely.
Example
When Denise seller-financed the sale of her rental property, she structured payments as if amortized over 30 years but included a balloon payment due at year five, giving her buyer a manageable start and herself a firm payoff date. Her buyer made steady monthly payments for five years, improving his credit along the way, then refinanced with a bank and paid Denise the remaining balance in one lump sum right on schedule. It gave Denise steady income up front and a defined date to plan around, which she used to help fund a portion of her own retirement instead of leaving the money tied up indefinitely. She'd also had her attorney include a clause allowing a short extension in case the buyer needed a little more time to refinance elsewhere. When year five arrived, the buyer's new bank loan funded a week early, and Denise received the full remaining balance without any drama. She said the balloon structure gave her the best of both worlds: monthly income for years, followed by a full, predictable payoff.