Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What is a balloon loan?

1. A loan that is fully amortized over its term

2. A loan that requires a large final payment due at the end

3. A loan secured by commercial property only

4. A loan that has an adjustable interest rate

The correct answer is: A loan that requires a large final payment due at the end

A balloon loan is characterized by requiring a substantial final payment due at the end of its term. This loan structure typically involves smaller periodic payments over the life of the loan, which may not fully cover the principal amount, leading to that large "balloon" payment at maturity. Such a payment covers the remaining balance of the loan that has not been amortized through the regular payments. This feature often makes balloon loans attractive for borrowers who anticipate either selling the property before the loan term ends or refinancing before the balloon payment is due. In comparison, a fully amortized loan would require the borrower to make consistent payments that entirely cover both the principal and interest over the loan's term, eliminating the need for a large final payment. A loan secured by only commercial property does not inherently qualify as a balloon loan; this classification can pertain to various types of properties. Similarly, while some balloon loans may have adjustable interest rates, the essential defining characteristic of a balloon loan is the large payment due at the end, rather than the nature of the interest rate.