Washington State Real Estate Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

A "balloon payment" refers to a large final payment due at the end of a loan term. This type of payment structure is often associated with loans that are partially amortizing, meaning that the regular payments made during the term do not entirely pay off the principal balance by the end of the term. Instead, the borrower makes smaller, more manageable payments throughout the duration of the loan, usually consisting of interest and some principal, and then is required to make a single, significant payment (the balloon payment) to satisfy the remaining balance.

This structure can be beneficial for borrowers who anticipate being able to refinance or sell the property before the balloon payment is due. It can also result in lower monthly payments compared to a fully amortizing loan, providing flexibility in cash flow.

The other choices do not accurately describe a balloon payment. For example, prepaid interest does not relate to the concept of a balloon payment; rather, it involves paying interest in advance on a loan. A penalty fee for late payments pertains to the consequences of not adhering to payment schedules, while an initial deposit for loan approval, often known as an earnest money deposit, is not related to the requisite final payment on a loan.