Final answer:
The final payment of a mortgage loan significantly larger than the regular payments is known as a balloon payment. It is designed to pay off the remaining balance at the end of the mortgage term, and borrowers need to plan for this substantial sum.
Step-by-step explanation:
The last payment on a mortgage loan that is at least twice as much as any other payment and generally is made at the end of the term to pay off the loan is called a balloon payment.
Balloon payments are often associated with mortgage loans that have a balloon payment schedule, which requires borrowers to pay a large sum at the end of their mortgage term after making smaller monthly payments. Mortgages that include a balloon payment are structured so that the monthly payments do not fully amortize the loan.
Instead, the payments cover the interest and part of the principal, but leave a significant balance owing at the end. Since the purpose of the balloon payment is to pay off the remaining balance on the mortgage loan, borrowers need to plan accordingly or refinance to manage this large financial obligation.
It is crucial for borrowers to understand how their monthly payments, interest rates, and the end-term balloon payment will affect their overall financial commitments.