California Real Estate Practice Exam

A “balloon payment” in a construction mortgage agreement refers to:

1. a lump sum payment that pays off the remaining balance

2. a monthly installment payment

3. a payment for interest only

4. a payment for property taxes

The correct answer is: a lump sum payment that pays off the remaining balance

A “balloon payment” in a construction mortgage agreement is characterized as a lump sum payment that pays off the remaining balance of the loan after a series of smaller periodic payments. This type of payment structure is often structured so that the borrower pays lower monthly installments throughout the life of the loan, with the final balloon payment being significantly larger, encompassing the remaining principal due at the end of the loan term. This arrangement is common in construction financing because it allows the borrower to manage cash flow better during the construction phase, with the expectation that the property will generate sufficient income or increase in value upon completion to cover the balloon payment. In contrast, the other options represent different types of payments that do not summarize the structure and purpose of a balloon payment in this context.