Part of a loan
agreement in which the usual payment
is lower than usual, but one payment is much larger.
A balloon payment (so called because the amount inflates and rises rapidly, like a balloon) can sometimes save money if you plan carefully. You get the use of your money until that point, so you can invest it rather than paying it to the bank in a larger monthly payment. It's especially useful if you know that you will refinance before the balloon payment is due.
For many people, however, this option can lead to trouble; it's not for the undisciplined. If you think that an extra hundred dollars per month means more fun money, rather than an opportunity to invest, stay far away from a balloon payment. You will find yourself on the ugly end of a demand for several thousand dollars in a lump sum.
On the other hand, if you're the type who reads The Motley Fool regularly and knows what percentage of your investments are in what sectors, you could find that a balloon payment is right up your alley.