Glossary
Balloon Payment
A balloon payment is the large lump sum due at maturity of a loan whose regular payments do not fully repay the principal during the term. It occurs when amortization is longer than the term, or the loan is interest-only, and is usually paid by refinancing or selling the asset.
Formula
Example
A $5,000,000 loan at 6% with a 30-year amortization and a 10-year term has a monthly payment of about $29,978. After 120 payments, the remaining balance is about $4,184,286, which is due as a balloon at maturity. If property NOI is $450,000 at that point and a lender requires a 10% debt yield, the maximum new loan is $4,500,000, enough to refinance the balloon.
How it is used in underwriting
Balloon structures are standard in commercial real estate and many business loans because they let lenders offer long amortization, and therefore manageable payments, without committing capital for 25 or 30 years. The tradeoff is refinance risk: the borrower must find new financing or sell at maturity, regardless of interest rates, property performance or credit market conditions at that time. Underwriters therefore test the loan at maturity, projecting NOI and applying stressed interest rates, DSCR and debt yield requirements to see whether a refinance would be feasible for the balloon amount.
Maturity defaults tend to cluster when rates rise or values fall sharply, since many loans that met their payments throughout the term cannot refinance at the same size. Borrowers can reduce this risk by choosing shorter amortization, making voluntary principal payments where prepayment terms allow, or laddering maturities across a portfolio. Lenders may offer extension options, but these usually carry conditions such as minimum DSCR or debt yield and a fee. In consumer lending, balloon mortgages are less common and are subject to additional regulation, so the term most often appears in commercial and small business credit.
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Frequently asked questions
Why do commercial loans have balloon payments?
Lenders want to limit how long their money is committed and how much interest rate risk they take, so they set terms of five to ten years. To keep payments affordable, they calculate those payments over a longer amortization, such as 25 or 30 years. The difference is the balloon due at maturity.
What happens if you cannot pay a balloon payment?
If a borrower cannot refinance or sell to repay the balloon, the loan goes into maturity default. Lenders may negotiate an extension or modification, often with a paydown, higher rate or fee, or they may pursue foreclosure or other remedies. Planning a refinance well before maturity reduces this risk.
How do you calculate a balloon payment?
Calculate the regular payment based on the amortization period, then compute the remaining principal after the number of payments in the loan term. A loan amortization schedule or financial calculator does this directly. For an interest-only loan, the balloon equals the original principal.
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