What type of payment must a buyer make after 5 years if the seller requires it on a 30-year amortization schedule?

A balloon payment is a large lump sum payment that is due at the end of a loan or lease, often after a series of smaller regular payments have been made. In the context of a 30-year amortization schedule, the borrower typically makes monthly payments that cover interest and principal over 30 years. However, if the loan terms dictate that the full principal balance is due after a shorter period, such as 5 years, the borrower will need to make a balloon payment at that time.

This situation often arises in certain types of loans where the borrower is not expected to fully pay off the loan with the monthly amortized payments. Instead, they might only pay interest for a specific period or may face a situation where the remaining balance is significantly larger after the initial period. Here, after 5 years, the buyer would be obliged to pay the outstanding balance in one large payment, which is characteristic of a balloon payment.

By contrast, amortized, prepayment, and adjustable payments refer to different notable loan characteristics or terms but do not specifically describe the payment structure that leads to a substantial end-of-term payment requirement. Amortized payments would involve equal monthly payments throughout the loan's life until the loan is fully paid off, prepayment refers to