A balloon payment is a large, lump-sum payment made at the end of a long-term loan. It is commonly used in commercial real estate finance, where the borrower makes installment-like payments for a certain number of periods before the final payment to pay off the remainder of the loan. This last payment is called a balloon payment because of its large size compared to the smaller increments paid up until that point.

A typical residential mortgage may be fully amortized, which means the borrower makes the same payment for the life of the loan unless it is refinanced or paid early. However, in commercial real estate finance, loans are generally structured as balloon mortgages in which only part of the debt is amortized, with the balance due as one lump sum.

For example, a 5/25 loan has its principal and interest payments calculated based on a 25-year amortization, but the loan becomes due in full at the end of the last month of the fifth year. Generally, if loans like these carry prepayment penalties, the prepayment penalty is waived in the last 90 days before maturity so the borrower can refinance or sell without being penalized for doing so.

The main advantage of a balloon payment in commercial real estate is that it allows the borrower to make smaller payments over a longer period of time. This can be beneficial for borrowers who may not have the cash flow to make larger payments. Additionally, balloon payments can be structured to have a lower interest rate than a fully amortized loan, which can save the borrower money in the long run.

The main disadvantage of a balloon payment is that the borrower must pay off the entire loan balance in one lump sum at the end of the loan term. This can be difficult for borrowers who may not have the funds available to pay off the loan. Additionally, if the borrower is unable to pay off the loan, they may be subject to prepayment penalties or other fees.

The main risk associated with a balloon payment in commercial real estate is defaulting on the loan. Defaulting is the worst option you have on the table, as it can be immensely damaging to your commercial real estate investment career. Significantly fewer lenders will consider extending financing to a borrower that has defaulted, which means any financing you get in the future will be far more expensive — and bear far poorer terms — than it would otherwise. Additionally, most loans with balloon payments are non-recourse, meaning the lender cannot tap into your personal assets or income streams. Only the property is on the hook.

For more information, please see this article and this article.

Balloon payments in commercial real estate are typically structured as two-step financial products, where the borrower makes installment-like payments for a certain number of periods before the final payment to pay off the remainder of the loan. The most common type of balloon payment is a 5/25 loan, which has its principal and interest payments calculated based on a 25-year amortization, but the loan becomes due in full at the end of the last month of the fifth year. Other types of balloon payments may be structured differently, depending on the loan terms. For more information, please contact a commercial mortgage professional.

You can use MortgageCalculator.org’s Balloon Mortgage Calculator to calculate a balloon payment in commercial real estate. Enter in your loan amount, interest rate, loan term, and first payment date. If you have information on your upfront payment fee, loan fee, and final balloon payment fee you can enter those as well. The calculator will be able to tell you how many monthly payments you’ll have to make before your balloon payment is owed, your total costs in principal and interest, and more. Create a printable amortization schedule right on the page to view your costs over time.

The best strategies for managing a balloon payment in commercial real estate are to refinance, sell the property, or negotiate with the lender. Refinancing is generally the best way to move forward, as it allows you to take advantage of current market rates. Selling the property is also an option, but it may be difficult to find a buyer willing or able to finance the acquisition of your asset. Lastly, negotiating with the lender may be an option, depending on the situation.

For more information, please see this article from Multifamily.Loans.