The large principal balance due at a loan's maturity when the loan does not fully amortize over its term.
The longer version
A balloon payment is the large final payment due when a loan's term ends before its principal has been paid down. It arises whenever the amortization period is longer than the loan term, and in commercial real estate that is the normal structure rather than the exception.
A typical example is a ten-year term on a thirty-year amortization schedule. Monthly payments are calculated as if the loan ran thirty years, which keeps them affordable, but the loan matures at ten, and the remaining balance is due in one payment. An interest-only loan is the extreme version: no principal is repaid during the term, so the entire principal balloons at maturity.
Almost no borrower writes that check. The balloon is repaid by refinancing or selling the property, which is why the real risk in a balloon structure is refinance risk. If rates have risen, values have fallen, or the property's income has weakened by maturity, the new loan available may be smaller than the balance due.
Lenders look at that risk at origination by testing how the loan would refinance at maturity under stressed assumptions, and by watching debt yield, which does not depend on rates or cap rates. As maturity approaches, extension options, rate caps and the refinance timeline become active asset management items.
Common questions
- What is a balloon payment?
- The lump sum due when a loan matures before it is fully paid off. It happens when payments are calculated on a longer amortization than the loan's term, so a large balance remains at maturity.
- Are commercial real estate loans balloon loans?
- Most are. A common structure is a five, seven or ten year term on a twenty-five or thirty year amortization, and interest-only loans repay no principal at all during the term. The balance is repaid at maturity by refinancing or selling the property.
- What happens if you cannot pay the balloon payment?
- The loan is in maturity default. Borrowers usually negotiate an extension, a modification or a discounted payoff, or sell the property. Lenders reduce this risk at origination by testing whether the loan could refinance at maturity under stressed rates and values.
- How do you calculate a balloon payment?
- It is the remaining loan balance at maturity under the amortization schedule. Calculate the payment on the full amortization period, then find the balance left after the number of payments in the loan term. That balance is the balloon.
- The due diligence checklist, built to be runChecklists as systems, not documents.
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- Commercial real estate loan calculatorRun the payment and the balloon on your own loan.