Balloon payment

The lump sum of remaining principal due at the end of a loan's term when the regular payments did not pay the loan off in full.

The OCC’s glossary defines a balloon payment as the payment required at the end of the term to repay the remaining principal on a loan that does not fully amortize over its term. It appears whenever the term is shorter than the amortization period, which is the usual shape of a commercial real estate loan from a bank or credit union.

The OCC’s own example: $1,000,000 at 6 percent, payments set on a 25-year schedule, a five-year term. The payments total about $6,443 a month, and at the end of year five roughly $899,000 is still owing. That sum is the balloon.

Few borrowers pay a balloon from cash. The plan is normally to refinance or sell before maturity, so the real question a lender asks is whether the property will support a new loan when the balloon comes due. The handbook calls this the balloon or full repayment risk at maturity, and it notes that interest-only terms and long amortization periods raise it.

SBA 7(a) loans are the exception among common products: SBA’s rule and its loan manual say a 7(a) loan may not have a balloon.

Go further

• Amortization and balloon calculator: Payment, balance over time and the balloon due at maturity.
• Multifamily loan comps: Multifamily loans made, with median reported rate and term by lender.
• Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
• How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
• SBA 7(a) or 504: which fits your loan: Both are SBA loans, and they work differently. The choice usually turns on what you are buying and how much cash you can put in.

Related terms

• Amortization: The schedule on which a loan's principal is paid down through regular payments. The amortization period sets the payment size and can be longer than the loan's term.
• Interest-only (IO): A loan, or a stretch of a loan's term, in which payments cover interest alone and the principal balance does not go down.
• Permanent loan: A longer-term loan on a finished, leased property that replaces the construction or bridge loan and is repaid from the property's income.
• Bridge loan: A short-term loan that carries a newly built or newly bought commercial property until it is leased and earning enough to be sold or refinanced with a permanent loan.
• Mini-perm: A medium-term loan, shorter than a permanent loan, that a bank makes on a finished property so the owner has time to lease it up before long-term financing.
• Prepayment penalty: A charge a loan agreement sets for paying off some or all of the principal before a stated date. Common forms are a step-down schedule, yield maintenance and defeasance.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.