How a lender sizes the refinance
Your old lender doesn’t matter much once the balloon is due. The new lender starts from scratch and lends the lowest of a few limits:
- Loan-to-value. A share of today’s appraised value, often 65–80% for commercial and investment property.
- Debt service coverage (DSCR). The property’s net operating income has to cover the new payment by a margin, usually 1.20x–1.25x. The higher the rate, the smaller the loan the same income supports.
- Debt yield, for some bank and CMBS lenders: NOI as a percentage of the loan, often 8–10%.
The calculator works out the loan you need, which is the balloon plus closing costs on the new loan, and compares it with the largest loan the property supports. If the supported loan is bigger, the refinance covers the balloon and the difference is room for cash out. If it is smaller, the gap is cash you would need to bring to closing.
Largest loan = lowest of value × max LTV, and the loan whose payment equals NOI ÷ minimum DSCR
Example: a 2019 loan coming due
Say an investor borrowed $1,200,000 in 2019 at 4.5% on a 25-year amortization with a 7-year term. The payment was $6,669.99 a month, and after 84 payments the balloon is $986,211. The property is now worth $1,500,000 and produces $105,000 of net operating income.
Refinancing at an example rate of 7.25% on a 25-year amortization, with 75% max LTV, a 1.25x DSCR minimum and 2% closing costs:
- Loan needed to pay the balloon and costs: $1,006,338
- Loan-to-value limit: $1,125,000, which is plenty
- DSCR limit: $968,447, which is the binding constraint
- Cash needed at closing: $37,133
The property has plenty of equity, yet the refinance still comes up short. Income is the problem: at 7.25% it would take about $109,108 of NOI to support the full payoff. Income supports the payoff up to a rate of about 6.82%.
Why rates matter more than the balloon
Same property, same balloon, three example rates:
| New loan rate | Largest loan | Result |
|---|---|---|
| 6.25% | $1,061,138 | Covered, $53,704 to spare |
| 7.25% | $968,447 | $37,133 short |
| 8.25% | $887,818 | $116,150 short |
Each point of rate moves the supportable loan by roughly $86,660 here. That is why loans written in 2019–2021 are the ones most likely to hit a gap at maturity, even when the property has done well. Use the rate fields as a stress test: if the payoff only works at the low end, plan for the high end.
If the new loan comes up short
A shortfall on paper is common and usually fixable. The usual levers, roughly from cheapest to most expensive:
- Raise NOI before you apply. Renew leases, bring below-market rents up, and clean up expenses. In the example, $110,000 of NOI would cover the payoff at the same rate.
- Change the structure. A 30-year amortization or an interest-only period lowers the payment, so the same income supports a larger loan.
- Change the lender. DSCR minimums range from about 1.0x with some private and DSCR lenders to 1.35x at conservative banks.
- Pay down the difference from cash or another property’s equity.
- Bridge the gap. A short-term bridge loan sized on value rather than current income can pay off the balloon while you lease up or raise rents, then refinance into permanent debt.
- Extend. The current lender may grant a short extension, usually for a fee and sometimes with a paydown. It isn’t guaranteed.
Refinancing before the due date
Start 6–9 months before maturity. A commercial refinance takes 45–90 days, and starting early leaves room to fix a shortfall instead of negotiating under a deadline. Check your note first: many commercial loans carry a prepayment penalty that steps down or disappears in the last few months. The prepayment penalty calculator shows what paying off early would cost. If you don’t know the exact balloon yet, the remaining balance calculator will estimate it from your original loan terms.