If you hold a commercial mortgage, there is a strong chance your loan includes a balloon payment. Unlike residential mortgages that typically amortize over 30 years, most commercial real estate loans are structured with shorter terms that leave a large remaining balance due at maturity. Understanding how a balloon payment commercial loan works, and what your options are when that payment comes due, is critical to protecting your investment.
This guide breaks down everything you need to know about balloon payment structures in commercial lending, from how they work to the strategies that help you manage or avoid them entirely.
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What Is a Balloon Payment on a Commercial Loan?
A balloon payment is a large, lump-sum payment due at the end of a commercial loan term. In most commercial mortgages, the monthly payments are calculated based on a longer amortization schedule (typically 25 to 30 years), but the loan itself matures much sooner, usually within 3 to 10 years. The remaining unpaid principal balance at that point becomes the balloon payment.
For example, if you borrow $1 million at 7% interest with a 5-year term and 25-year amortization, your monthly payments are approximately $7,057. After five years of payments, you will have paid down roughly $63,740 in principal. The remaining balance of approximately $936,260 is your balloon payment, due in full on the maturity date.
This structure exists because commercial lenders want to limit their interest rate risk exposure. By keeping loan terms shorter, banks and lenders can re-evaluate the borrower, the property, and the market conditions every few years rather than locking in rates for decades.
According to the Consumer Financial Protection Bureau, a balloon payment is a larger-than-usual one-time payment at the end of the loan term. In commercial real estate, this structure is the norm rather than the exception.
How Do Balloon Payments Compare to Fully Amortized Loans?
The most important distinction between a balloon loan and a fully amortized loan is what happens at the end of the term. With a fully amortized loan, every scheduled payment chips away at both principal and interest until the balance reaches zero. With a balloon loan, you are only partially paying down the principal during the loan term.
Here is a practical comparison using a $1 million loan at 7% interest:
In a 5/25 balloon structure, your monthly payment is $7,057 for five years. At the end of year five, you still owe $936,260. In a fully amortized 25-year loan, your monthly payment is also $7,057, but you continue making payments for the full 25 years until the balance is zero.
The monthly payments are identical during the first five years because both use the same amortization schedule. The difference is that the balloon loan forces you to deal with the remaining balance much sooner.
Use our commercial mortgage calculator to model different balloon and amortization scenarios for your specific loan amount.
What Is a 5/25 Balloon Loan?
A 5/25 balloon loan is one of the most common structures in commercial real estate financing. The "5" refers to the loan term (five years), and the "25" refers to the amortization period used to calculate monthly payments (25 years). At the end of year five, the entire remaining balance becomes due as a balloon payment.
According to Commercial Real Estate Loans, this structure is standard across the industry because it balances the borrower's need for manageable monthly payments with the lender's need to reassess risk at regular intervals.
Other common balloon structures include:
- 7/25 loans with a 7-year term and 25-year amortization
- 10/25 loans with a 10-year term and 25-year amortization
- 5/30 loans with a 5-year term and 30-year amortization
- 3/25 loans with a 3-year term and 25-year amortization
The shorter the loan term relative to the amortization period, the larger the balloon payment will be. A 3/25 loan leaves a much larger balance at maturity than a 10/25 loan because less principal has been repaid over the shorter period.
Lenders favor these structures because they provide natural exit points where they can re-evaluate the loan, adjust rates to current market conditions, or choose not to renew if the borrower or property no longer meets their criteria.
What Happens When a Commercial Balloon Payment Is Due?
When your balloon payment comes due, you must satisfy the remaining loan balance in full. This is the single most critical event in the lifecycle of a commercial mortgage, and being unprepared can have severe consequences.
Here are the primary outcomes when a balloon payment matures:
Refinance the loan. The most common approach is to take out a new commercial loan to pay off the existing balloon balance. According to industry data, approximately 70% of commercial borrowers refinance their balloon payment rather than paying it off in cash. You can refinance with your current lender or shop for better terms with a new one. Visit our refinancing page to explore your options.
Sell the property. If property values have appreciated or if refinancing is not practical, selling the property and using the proceeds to pay off the balloon is a viable strategy. Roughly 18% of borrowers choose this route.
Pay it off in cash. Some borrowers, particularly those who have accumulated significant equity or have other liquid assets, simply pay the balloon payment in full. This eliminates the loan entirely but requires substantial capital.
Negotiate an extension. In some cases, lenders will agree to a short-term extension of the loan, typically 6 to 12 months, to give borrowers additional time to arrange refinancing or complete a sale. Extensions often come with higher interest rates or fees.
Default. If you cannot refinance, sell, or pay the balloon, you risk defaulting on the loan. Default can lead to foreclosure, loss of the property, and damage to your credit. According to TMC Financing, this is exactly why planning ahead is essential.
Ready to plan your balloon payment strategy? Contact Clearhouse Lending to discuss your options with an experienced commercial loan advisor.
Can You Refinance a Balloon Payment on a Commercial Loan?
Yes, refinancing is the most common strategy for handling a balloon payment on a commercial loan. In fact, most borrowers enter into balloon-structured loans with the full expectation that they will refinance before or at maturity.
However, refinancing is not guaranteed. Several factors determine whether you qualify and what terms you will receive:
Property value. Your loan-to-value (LTV) ratio at the time of refinancing must meet the new lender's requirements. If property values have declined, you may need to bring additional cash to close the gap.
Borrower financials. Lenders will re-evaluate your income, net worth, credit score, and debt service coverage ratio (DSCR). If your financial position has weakened since the original loan, qualifying may be more difficult.
Market conditions. Interest rates at the time of refinancing may be significantly higher or lower than your original rate. In the current market, many borrowers who locked in rates below 5% during 2020-2022 are now facing refinancing rates above 6.5%, which increases monthly payments substantially.
Property condition. The physical condition and occupancy of your property matter. Lenders want to see well-maintained assets with stable or growing cash flow.
The best approach is to start the refinancing process 12 to 18 months before your balloon payment is due. This gives you time to shop multiple lenders, address any issues with your financials or property, and lock in favorable terms. Our permanent loan programs offer longer terms that can help you avoid the balloon cycle entirely. Learn more in our permanent commercial loan guide.
How Does Balloon Maturity Affect Your Commercial Property?
The approaching maturity of a balloon payment has direct and indirect effects on your commercial property investment that extend beyond the loan itself.
Cash flow pressure. As maturity approaches, you may need to set aside reserves for potential closing costs on a refinance (typically 1-3% of the loan amount) or to cover a gap if your new loan has a higher interest rate. According to Growth Corp, SBA 504 loans can provide relief by offering fully amortized terms that eliminate future balloon payments.
Property value sensitivity. If your property value has decreased since you took out the original loan, your LTV ratio may exceed what lenders will accept. This can force you to bring additional equity to the table or accept less favorable terms.
Capital improvement timing. Smart property owners time major renovations and improvements well before balloon maturity. Completing value-add projects 12-24 months before maturity gives improvements time to stabilize and increase property value, which strengthens your refinancing position.
Tenant and lease considerations. Lenders look at your rent roll and lease expirations when evaluating a refinance. If several major leases expire near your balloon date, this adds risk that could affect your loan terms.
Opportunity cost. The uncertainty of a pending balloon payment can prevent you from pursuing other investment opportunities. Capital that could be deployed elsewhere may need to be held in reserve.
For a detailed breakdown of what to expect during refinancing, see our guide on commercial loan closing costs.
How Do You Avoid a Balloon Payment on a Commercial Loan?
While balloon payment structures dominate commercial lending, there are strategies and loan products that allow you to avoid them:
SBA 504 loans. The SBA 504 program offers fully amortized terms of 20 or 25 years with fixed interest rates. There is no balloon payment because the loan pays down to zero over the full term. The trade-off is that SBA 504 loans require owner-occupancy of at least 51% of the property.
Fully amortized conventional loans. Some banks and credit unions offer fully amortized commercial mortgages, though these are less common and typically reserved for borrowers with strong financials and properties with stable cash flow. Terms usually range from 15 to 25 years.
Life insurance company loans. Life insurance lenders sometimes offer longer-term, fully amortized loans for stabilized, high-quality commercial properties. These can extend to 25 or even 30 years with no balloon.
USDA business loans. For properties in rural areas, USDA-backed commercial loans can offer fully amortized terms that eliminate balloon payment risk.
Negotiate balloon-free terms upfront. During initial loan negotiations, ask specifically about fully amortized options. Some lenders offer them at a slightly higher rate, which may be worth the trade-off for the certainty of no balloon.
If you already have a balloon loan and want to transition away from balloon structures, refinancing into a permanent loan with a longer, fully amortized term is often the best path forward.
What Are Alternatives to Balloon Payment Loan Structures?
Beyond specific loan products, understanding the full range of commercial loan structures helps you choose the right financing for your situation:
Fully amortizing fixed-rate loans. Equal payments over the entire term with no remaining balance at maturity. Monthly payments are higher, but you have complete certainty about your total cost.
Adjustable-rate mortgages (ARMs). These loans may be fully amortizing but carry variable interest rates that reset at set intervals. A 5/1 ARM adjusts every year after the initial 5-year fixed period. While they avoid a balloon, they introduce interest rate uncertainty.
Interest-only loans. These require even less in monthly payments than balloon loans because you are paying no principal at all. However, the full principal balance is due at maturity, making the "balloon" even larger. These are typically used for short-term bridge financing or value-add projects. Learn more about bridge loan options.
Construction-to-permanent loans. For new development projects, these loans convert from a construction draw facility into a permanent, fully amortized mortgage. This eliminates the need for separate balloon financing. Read our guide on construction to permanent loan requirements.
Seller financing with flexible terms. In some transactions, sellers offer financing with customized terms that may include longer amortization periods, lower rates, or no balloon. These are negotiable and can be tailored to both parties' needs.
Each structure carries different trade-offs between monthly payment size, total interest cost, flexibility, and risk. Your choice should align with your investment timeline, risk tolerance, and exit strategy.
Need help finding the right loan structure? Contact Clearhouse Lending for a personalized analysis of your commercial financing options.
What Mistakes Should You Avoid with Balloon Payment Loans?
Borrowers who run into trouble with balloon payments usually make one or more of these common mistakes:
Waiting too long to plan. The single biggest mistake is not starting the refinancing process early enough. Ideally, you should begin exploring options 12 to 18 months before maturity. Waiting until the last few months creates urgency that limits your negotiating power and available options.
Ignoring changing market conditions. Interest rates, property values, and lending standards change over time. A loan that was easy to refinance when you originated it may be harder to refinance in a different market environment. According to Terrydeal Capital, the average rate on maturing 2025 loans was about 4.91%, while current refinancing rates exceed 6.5%.
Deferring maintenance. Lenders evaluate property condition during the refinancing process. Deferred maintenance reduces property value and can result in lower appraisals, higher LTV ratios, and worse loan terms.
Overleveraging. Taking on additional debt or pulling equity from the property through supplemental financing can increase your LTV to the point where refinancing becomes difficult.
Not maintaining financial records. Lenders require detailed financial documentation for refinancing. Keep your tax returns, operating statements, rent rolls, and expense reports organized and current at all times.
Failing to shop around. Loyalty to your current lender is fine, but always compare offers from multiple lenders. The difference between a 6.5% and 7.0% rate on a $1 million loan is approximately $3,600 per year.
What Are the Most Common Questions About Balloon Payments?
How is a balloon payment calculated? The balloon payment equals the remaining principal balance on the loan at the maturity date. It is calculated by running the amortization schedule for the loan term and determining how much principal remains unpaid. For a $1 million loan at 7% with a 5-year term and 25-year amortization, the balloon payment after 5 years is approximately $936,260.
What is the difference between a balloon payment and a bullet payment? A bullet payment refers to a loan where only interest is paid during the term, with the entire original principal due at maturity. A balloon payment occurs on a partially amortized loan where some principal has been paid, but a large remaining balance is still due. Both require a lump sum at maturity, but the bullet payment amount is larger because no principal reduction occurred.
Can I make extra principal payments to reduce my balloon? Many commercial loans allow prepayment, though some include prepayment penalties during the first few years. Check your loan documents for any prepayment restrictions. Making extra principal payments reduces the eventual balloon amount, which improves your refinancing position.
What credit score do I need to refinance a balloon payment? Most conventional commercial lenders require a minimum credit score of 660 to 680 for refinancing. SBA loans typically require 680 or higher. Borrowers with scores above 720 generally receive the most competitive terms and rates.
Is a balloon payment tax deductible? The balloon payment itself is a return of principal and is not tax deductible. However, the interest portion of your monthly payments during the loan term is deductible as a business expense. Refinancing costs may also be partially deductible. Consult a tax professional for guidance specific to your situation.
How much notice does a lender give before a balloon payment is due? Most loan agreements specify the exact maturity date from the start. Lenders typically send a reminder 60 to 90 days before the balloon is due, but the responsibility to track your maturity date falls on you as the borrower. Do not wait for a lender notice to begin planning.
What happens if I cannot refinance and cannot sell? If you cannot refinance or sell by the maturity date, you should immediately contact your lender to discuss options. Some lenders will grant a short-term extension (3-12 months) at a penalty rate. Others may agree to a loan modification. If no resolution is reached, the lender can declare the loan in default and begin foreclosure proceedings.
Take control of your balloon payment strategy today. Contact Clearhouse Lending to speak with a commercial lending specialist who can help you evaluate your refinancing options and create a plan well before your maturity date.
Sources: Consumer Financial Protection Bureau, TMC Financing, Growth Corp, Terrydale Capital, Commercial Real Estate Loans