Balloon Payment
A large principal balance due at the end of a loan term that was not fully amortized.
A balloon payment is the lump-sum principal balance that remains when a loan's term ends before it fully amortizes. Because commercial loans often use a longer amortization than their term, the borrower makes regular payments for years and then owes the entire remaining balance at maturity.
A loan with a 10-year term and a 25-year amortization leaves a large balance at year 10. Borrowers usually plan to refinance, sell, or pay off the balloon with other capital before it comes due. The lender sets the maturity date knowing this from the start.
The main risk is a maturity wall: if rates have risen or the property underperforms when the balloon is due, refinancing can be harder or more expensive. Planning the exit well before maturity is part of any sound deal.
Formula
Balloon = remaining balance at term end after partial amortization
Worked Example
A $3,000,000 loan with a 10-year term and 25-year amortization at 7% still owes roughly $2,450,000 at year 10. That balance is the balloon the borrower must refinance or repay.
Why It Matters
A balloon sets a hard deadline to refinance or sell. Miss it and you risk default, so borrowers watch the maturity date and start planning the exit a year or more ahead.
Related Terms
Related Programs and Tools
Frequently Asked Questions
Why do commercial loans have balloon payments?
Lenders want to reset rate and terms periodically rather than lock a rate for 25 or 30 years. A shorter term with a longer amortization keeps payments low while limiting rate exposure.
What happens if I cannot pay the balloon?
You typically refinance or sell before maturity. If neither is possible, the loan can default, so borrowers line up an exit well ahead of the due date.