Balloon Payment

What Is a Balloon Payment?

A balloon payment is the remaining principal balance that comes due as a lump sum at the end of a commercial loan term. It exists because most commercial real estate loans use a shorter term (typically 5, 7, or 10 years) than their amortization schedule (typically 25 or 30 years). When the term ends, the loan has not been fully paid off, and the remaining balance is due all at once.

For example, a $10 million loan with a 7% interest rate, 10-year term, and 30-year amortization has a monthly payment of roughly $66,530. After 10 years of payments, the borrower has paid down some principal, but approximately $8.3 million still remains. That $8.3 million is the balloon payment.

Why Commercial Loans Are Structured This Way

Residential mortgages typically run 30 years and fully amortize, meaning no balloon. Commercial loans are different for several reasons:

Lender risk management. A 30-year commitment on a commercial property carries substantial risk. Tenants leave, markets shift, properties deteriorate. Lenders want the ability to reassess the loan every 5-10 years rather than being locked in for three decades.

Rate repricing. Even on fixed-rate loans, the term structure lets lenders reprice at maturity. If rates have risen, the borrower refinances at the new rate. This protects the lender from being stuck with a below-market rate for 25-30 years.

Affordable payments. Using a 25 or 30-year amortization schedule keeps monthly payments manageable. If the lender forced a 10-year amortization on a $10 million loan, the monthly payment would jump from $66,530 to roughly $116,108. Most commercial properties cannot support that cash flow burden.

How to Calculate a Balloon Payment

The balloon payment is simply the remaining loan balance at the end of the term. You can find it by running an amortization schedule through the loan term, or using this formula:

Balloon = L × [(1+r)ⁿ - (1+r)^p] / [(1+r)ⁿ - 1]

Where L is the original loan amount, r is the monthly interest rate, n is the total amortization payments, and p is the number of payments made during the term.

Use the commercial mortgage payment calculator to see the balloon balance for any loan scenario.

Balloon Payments by Loan Type

HUD and SBA 504 loans are notable exceptions. HUD multifamily loans fully amortize over the loan term (up to 35 years), meaning no balloon payment. The SBA 504 CDC debenture portion also fully amortizes. These programs are attractive specifically because they eliminate balloon risk.

The Refinancing Cycle

Since most commercial loans end with a balloon payment, refinancing is a routine part of owning commercial property. A typical cycle looks like this: originate a 10-year CMBS loan, make monthly payments for 10 years, then refinance the balloon into a new loan. The new loan starts the cycle over.

This works well when property values are stable or rising and interest rates are manageable. It becomes a problem when:

• Property value has declined -- the new loan may not cover the full balloon amount, requiring the borrower to bring cash to closing
• Interest rates have risen significantly -- the new loan's payments may strain cash flow, or the property may not meet DSCR requirements at the higher rate
• Property performance has deteriorated -- higher vacancy, lower rents, or deferred maintenance can make the property harder to refinance
• Credit markets have tightened -- lenders may pull back from certain property types or markets

The 2023-2024 rate environment created a "wall of maturities" in commercial real estate, where billions in loans originated at 3-4% rates came due in a 6-7% rate environment. Many borrowers faced balloon payments they could not easily refinance because the higher rates pushed their DSCR below lender minimums.

Planning for a Balloon Payment

Start early. Begin exploring refinancing options 12-18 months before maturity. This gives you time to shop lenders, lock rates, and close without pressure.

Know your prepayment terms. If you want to refinance before the balloon is due, check whether your current loan has yield maintenance, defeasance, or a step-down penalty. Many CMBS loans have an open period in the final 3-6 months where no penalty applies.

Monitor property performance. Lenders will underwrite the refinance based on current NOI, not what the property was doing when you originally borrowed. Keep occupancy high, rents at market, and expenses controlled as maturity approaches.

Have a backup plan. If traditional refinancing is not available at acceptable terms, consider bridge financing, a loan extension from the current lender, bringing in equity partners, or selling the property. The worst outcome is reaching the balloon date with no plan.

Balloon Payment vs. Interest-Only Loans

Interest-only (IO) loans and loans with balloon payments both have large payments at maturity, but the mechanism is different. On an IO loan, none of the monthly payments go toward principal, so the full original loan amount is due at maturity. On a loan with a standard amortization schedule, each payment includes some principal, so the balloon is smaller than the original loan amount.

Some commercial loans combine both: an initial interest-only period followed by amortization. For example, a 10-year term with 2 years IO and 30-year amortization. During the IO period, the balance stays flat. Once amortization begins, the balance starts declining. The balloon at year 10 depends on how much amortization occurred in years 3 through 10.

Disclaimer: This glossary entry is for educational purposes only and does not constitute financial, legal, or investment advice. Loan terms, balloon payment amounts, and refinancing options vary by lender and property. Consult with a qualified commercial real estate professional for advice specific to your situation.

Frequently Asked Questions