What is a balloon mortgage and what risks does it carry?

A balloon mortgage requires the borrower to make regular monthly payments for a set period, typically five to seven years, and then pay the entire remaining balance in one large lump sum called a balloon payment. Monthly payments during the initial period may be calculated as if the loan is amortized over 30 years, making them low and affordable. The risk is that the borrower must either refinance, sell the property, or pay the full remaining balance when the balloon comes due. If property values drop or the borrower cannot qualify to refinance, they may face default and foreclosure.