| Detail | Explanation |
|---|---|
| Cause | Loan term shorter than the amortization period |
| Due | At maturity, in a single payment |
| Usually repaid by | Refinance or sale |
| Largest when | The loan is interest only or has a long amortization |
How do you calculate a balloon payment?
The balloon is the remaining balance on the amortization schedule after the last scheduled payment of the term. The commercial mortgage calculator shows it directly, including the effect of an interest-only period.
Balloon = loan amount x (1 + r)^k - monthly payment x ((1 + r)^k - 1) / r, where r is the monthly rate and k is the number of payments made
Worked example
In this hypothetical example, a $5,000,000 loan at 7.00% has a 10-year term. The table compares the balance due at maturity under 3 payment structures.
| Structure | Balloon due | Share of original loan |
|---|---|---|
| 30-year amortization | $4,290,619 | 85.81% |
| 25-year amortization | $3,931,670 | 78.63% |
| Interest only for the full term | $5,000,000 | 100.00% |
What is refinance risk at maturity?
The balloon has to be refinanced under whatever rates, values, and lender appetite exist when the loan matures. Continuing the hypothetical, suppose the property earned $500,000 of net operating income at closing, and at maturity income has slipped to $450,000 while new loans price at 8.00% on a 30-year amortization. A lender requiring 1.25x coverage could lend about $4,088,505, leaving a gap of $202,114 against the $4,290,619 balloon that the owner would need to fund.
Agency programs build this risk into underwriting. Freddie Mac's Optigo fixed-rate term sheet includes a refinance test and states that no refinance test is necessary if the loan has an amortizing debt coverage ratio of 1.40x or greater and a loan-to-value ratio of 60% or less.
How to manage a balloon
If a maturity is approaching, submit the loan details and Capital Partners will review refinance options.
- Start refinance work 12 to 18 months before maturity so there is time for appraisal, underwriting, and a fallback
- Match the loan term to the business plan and expected hold period
- Negotiate extension options, which usually require meeting coverage or debt yield tests at the time of extension
- Check the prepayment terms so an early refinance is possible if conditions are favorable
- Consider a bridge loan if the property needs time to recover income before a permanent refinance
Sources
Common questions
What happens if I cannot pay the balloon payment?
The loan is in maturity default. Owners typically seek a refinance, a sale, or an extension or modification from the lender. Lenders are not required to extend, so early planning matters.
Do all commercial loans have a balloon payment?
Most do, because terms are usually shorter than amortization. Some fully amortizing loans exist, including the SBA 504 debenture and HUD-insured multifamily loans, but they are less common for investment property.
Is a balloon payment bad?
It lowers payments during the term, which improves cash flow and coverage. The cost is exposure to rates, values, and lender appetite at maturity.
How far in advance should I refinance a balloon loan?
Many owners start 12 to 18 months before maturity. Prepayment penalties, rate outlook, and the property's income trend all affect the right timing.
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