Why commercial loans balloon
Banks, CMBS lenders and life companies rarely commit to one rate on a commercial property for 25 or 30 years. Instead they lend for a term of 5, 7 or 10 years and calculate the payment on a 20 to 30-year amortization so it stays affordable. At maturity the loan has to be refinanced or repaid. For an owner, that makes the balloon date a planned refinance, and planning for it is part of owning commercial property.
Example: 5-year term
A $1,200,000 loan at 7.5% on a 25-year amortization with a 5-year term:
- Monthly payment: $8,867.89
- Principal paid in five years: $99,209
- Balloon at year 5: $1,100,791 (91.7% of the loan)
The longer the amortization and the shorter the term, the bigger the share of the loan still owed at maturity.
Refinance risk at maturity
When the balloon comes due, the new lender sizes the loan on the property as it is then: the current value, the current net operating income and the current interest rate. If rates have risen, the same income supports a smaller loan, because debt service coverage (DSCR) falls. Owners who borrowed at low rates and face a balloon in a higher-rate market can find the new loan is smaller than the balloon. That gap has to be covered with cash, a second loan or a bridge loan.
Use the optional property value and NOI fields above to check LTV and DSCR. For a full refinance test, the commercial refinance calculator compares the existing loan with a new one.
Reducing balloon risk
- Start refinance conversations 6–9 months before maturity.
- Build NOI before the balloon: renew leases, raise below-market rents, trim expenses.
- Consider paying extra principal in the final years if the loan allows it without penalty.
- Know your loan’s prepayment terms. Some only open in the last 3–6 months.