National Real Estate Exam (PSI)FinancingHard
A borrower takes out a 5-year loan with monthly payments based on a 30-year amortization schedule, but the remaining balance becomes due in full at the end of year 5. This type of loan is called a:
- AGraduated payment loan
- BTerm loan
- CBalloon loan
- DWraparound loan
Show answer & explanationAnswer & explanation
Correct answer: C. Balloon loan
A balloon loan has payments calculated on a longer amortization period, but requires a large lump-sum ('balloon') payment of the remaining balance at the end of a shorter term.
Why the other options are wrong
- A. A graduated payment loan has payments that increase over time, not a lump-sum payoff.
- B. A term loan typically involves interest-only payments with principal due at maturity, not amortized payments.
- D. A wraparound loan combines an existing loan with a new loan, unrelated to this structure.
Balloon Loan
A loan with payments calculated on a longer amortization schedule than the actual loan term, resulting in a large final lump-sum payment.
- Payments are lower than a fully amortized loan of the same term
- Remaining balance due in full at maturity
- Common in short-term commercial or seller financing
Memory trick: Payments stay small until the balloon pops with one big payment.