CRE 101 · deweyluong.realtor

Balloon Payments and Interest-Only Periods Explained: How Commercial Loans Really Mature

Almost no commercial loan runs to the end of its own amortization schedule. The note sets a short term — five, seven, or ten years — while the monthly payment is calculated as if the borrower had 25 years to repay. Whatever principal is left when the term ends comes due all at once: the balloon payment. Interest-only periods push the same risk further, trading lower payments today for zero principal paid down. On the made-up example on this page, a $1,800,000 loan at 6.75% on a 25-year amortization still owes a $1,552,679 balloon after seven years of on-time payments — 86.3% of the original loan, arriving on one date. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers to teach the mechanics. The actual term, amortization, interest-only period, and balloon amount are defined loan by loan in the note and its amortization schedule — read both before pricing any purchase, sale, or refinance. This page is general education, not legal or tax advice.

Term, amortization, and interest-only: three different clocks

• Term vs. amortization: the term is how long the loan contract actually lasts; the amortization is the longer schedule used only to size the monthly payment. A 7-year term on a 25-year amortization is the standard commercial shape — and the gap between those two numbers is exactly where the balloon lives. See LTV and amortization for the payment math underneath.
• The balloon payment: the entire remaining principal, due in one lump sum on the maturity date. It is not a penalty and it is not optional — it is the loan's designed ending. The borrower's real exit is planned years ahead: refinance into a new loan, sell the property, or (rarely) pay it from cash.
• Interest-only (IO) periods: for an opening stretch — or occasionally the whole term — the payment covers interest only and the balance does not move at all. IO maximizes current cash flow, which is why value-add and lease-up deals use it, and it leaves the largest possible balloon: on a full-term IO loan, the balloon is the entire original loan amount.
• Refinance risk is the real risk: the balloon itself is just arithmetic. The danger is the market on the one date it lands — rates, lender appetite, the property's income, and its value that year. A loan that was comfortable at origination can come due into a market that will not replace it at the same size, which is why the exit gets underwritten on day one, alongside the DSCR the new lender will test.

Worked example: one $1,800,000 loan, seven years, one balloon (made-up numbers, labeled as such)

• The loan: $1,800,000 at 6.75% fixed, 25-year amortization (300 months), 7-year term (84 months). The property produces $165,000 of NOI a year — $13,750 a month.
• The amortizing payment: sized off the 25-year schedule, the payment is $12,436 a month, or $149,237 a year. Against $165,000 of NOI that is a DSCR of about 1.11x, and cash flow after debt service of about $1,314 a month.
• Seven years of on-time payments buy less than you think: after 84 payments the balance is $1,552,679. Only $247,321 of principal — 13.7% of the loan — was paid down, because the early years of a long amortization are mostly interest. The balloon is $1,552,679, or 86.3% of the original loan, due on one date in year seven.
• The same loan, interest-only: the payment drops to $10,125 a month ($121,500 a year), DSCR reads a flattering 1.36x, and cash flow rises to $3,625 a month. The cost: the balance never moves, so the balloon is the full $1,800,000 — and the extra $2,311 a month of cash flow was borrowed against a bigger maturity, not earned.
• Refinancing the balloon, base case: if NOI still stands at $165,000 in year seven, the property is worth about $2,538,462 at a 6.5% cap rate, and a new loan at 65% LTV provides $1,650,000 — enough to retire the $1,552,679 balloon with room to spare.
• The stressed case is the lesson: if NOI has slipped 10% to $148,500, the same math values the property at about $2,284,615, the new 65% loan is $1,485,000, and the borrower must bring roughly $67,679 in cash to close the refinance — or sell. Nothing about the loan changed; the income and the market did. Price that gap before you sign, the same way you price the exit in prepayment penalties and the exit cap rate.

What to check before you sign, buy, or refinance

• Circle the maturity date and work backwards: lenders want a refinance application months before the balloon lands, and a sale needs marketing time in front of it. The workable window opens 12–18 months out, not 60 days out.
• Ask for the amortization schedule, not just the payment: the schedule shows the exact balloon figure year by year. If a quote gives you a payment but not the maturity balance, you do not yet know the loan.
• Underwrite the IO period honestly: an IO payment makes DSCR and cash flow look stronger than the amortizing reality the next lender will use. Test the deal at the amortizing payment — and at the balloon — before the IO cash flow persuades you.
• Keep the second exit real: a balloon loan assumes a refinance or a sale will be available. Equity cushion, durable leases, and a property that would sell to someone else are what make that assumption safe; a thin-equity, single-tenant deal has only one door, and it is marked with the maturity date.

Cho nhà đầu tư người Việt

Hầu hết khoản vay thương mại không chạy hết lịch khấu hao của chính nó. Ngân hàng cho kỳ hạn ngắn — 5, 7 hoặc 10 năm — nhưng tính tiền trả hàng tháng theo lịch khấu hao 25 năm. Phần gốc còn lại khi hết kỳ hạn phải trả một lần: đó là balloon payment. Giai đoạn interest-only (chỉ trả lãi) còn đẩy rủi ro xa hơn: tiền trả hàng tháng thấp hơn nhưng số gốc không giảm đồng nào. Ví dụ giả định trên trang này: vay $1.800.000, lãi suất cố định 6,75%, khấu hao 25 năm, kỳ hạn 7 năm — tiền trả $12.436/tháng; sau 84 kỳ trả đúng hạn, dư nợ vẫn còn $1.552.679, tức mới trả được $247.321 tiền gốc (13,7%), và 86,3% khoản vay đến hạn cùng một ngày. Nếu vay interest-only toàn kỳ, tiền trả chỉ $10.125/tháng và DSCR trông đẹp hơn (1,36x thay vì 1,11x), nhưng balloon là toàn bộ $1.800.000. Điểm quyết định là khả năng tái cấp vốn vào ngày đáo hạn: nếu NOI giảm 10% xuống $148.500, khoản vay mới ở mức 65% LTV chỉ còn $1.485.000 và người vay phải bù thêm khoảng $67.679 tiền mặt. Bài học: đọc kỹ kỳ hạn, lịch khấu hao và số balloon trong khế ước vay ngay từ ngày ký, và lên kế hoạch thoát trước 12–18 tháng. Đây là thông tin giáo dục chung, không phải tư vấn pháp lý hay thuế.

Frequently asked questions

What is a balloon payment on a commercial loan?

A balloon payment is the entire remaining principal of a loan, due in one lump sum when the loan's term ends. Commercial loans pair a short term (commonly 5, 7, or 10 years) with a longer amortization schedule (commonly 25 years) used to size the payments, so most of the principal is still outstanding at maturity. On this page's made-up example, a $1,800,000 loan at 6.75% still owes a $1,552,679 balloon after seven years of on-time payments.

Why is the balloon so large after years of payments?

Because a long amortization front-loads interest. In the early years of a 25-year schedule, most of each payment is interest and only a small slice reduces principal. On the worked example, 84 on-time payments of $12,436 retired only $247,321 of the $1,800,000 loan — 13.7% — leaving 86.3% to come due at maturity.

What does an interest-only period do to the balloon?

During an interest-only period the payment covers interest only and the balance does not decline at all, so the balloon grows relative to an amortizing loan — on a full-term interest-only loan it equals the entire original amount. The trade is real: on the worked example, IO cuts the payment from $12,436 to $10,125 a month, but raises the maturity bill from $1,552,679 to the full $1,800,000.

What happens if you cannot refinance when the balloon comes due?

The borrower must still pay: options are bringing cash to close a smaller replacement loan, selling the property before or at maturity, negotiating an extension (never guaranteed, and usually priced), or defaulting if none of those work. On the worked example's stressed case — NOI down 10% — the refinance gap is roughly $67,679 of cash. Planning the exit 12–18 months before maturity is what keeps those options open.

Balloon payment trong vay thương mại là gì?

Balloon payment là toàn bộ số gốc còn lại của khoản vay, phải trả một lần khi hết kỳ hạn. Vay thương mại thường có kỳ hạn ngắn (5, 7, 10 năm) nhưng tính tiền trả theo lịch khấu hao dài (25 năm), nên phần lớn tiền gốc vẫn còn khi đáo hạn. Trong ví dụ trên trang này, khoản vay $1.800.000 lãi suất 6,75% sau 7 năm trả đúng hạn vẫn còn balloon $1.552.679. Nếu vay interest-only, balloon bằng toàn bộ số vay ban đầu. Đây là thông tin giáo dục chung, không phải tư vấn pháp lý hay thuế.

Looking at a loan whose maturity date is doing the deciding? Call Túy “Dewey” Luong, CCIM at 678-707-2498 or see SERHANT. Atlanta.