Illinois Real Estate Practice Exam 2025 - Free Real Estate Practice Questions and Study Guide

At the end of a term loan used for financing a home purchase, a balloon payment typically occurs if the loan is structured as such. This means that the borrower is required to make a large final payment when the term of the loan ends.

Term loans often consist of periodic payments that cover the interest and potentially some principal, but if the payments are not fully amortizing, a significantly larger payment at the end, known as a balloon payment, will need to be made. This is particularly common in loans designed for short terms or those with lower monthly payments.

In contrast, loan modification refers to changes made to the loan terms, such as extending the maturity, reducing the interest rate, or changing the monthly payment amount, but this process does not dictate what happens when the loan term concludes. Full loan forgiveness is not typically a feature of standard term loans, as borrowers remain responsible for repayment until the agreed-upon sum has been paid. A transfer of loan implies that the loan could be assigned or sold to another entity, which also does not address the outcome at the end of the initial loan term.

Understanding the concept of a balloon payment is crucial for borrowers, as it affects their financial planning and readiness to meet this significant payment when the loan term expires