Balloon Payments

“The Lump at the End”

A balloon payment is a large lump-sum payment due at the end of a loan term.

It occurs when the loan is not fully amortized — meaning the regular payments cover interest and only part of the principal, leaving a significant balance at maturity.

Example:   A business takes out a $1,000,000 loan with a 5-year term and a 25-year amortization.
Monthly payments are based on 25 years, but the loan matures in 5 — leaving a balloon payment of ~$850,000 due at the end.

Why Use Balloon Structures?

Advantage
(for Borrower)

Explanation

Lower monthly payments

Since amortization is stretched, monthly outflow is reduced

Improved cash flow

Frees up cash during early years for growth or investment

Flexible refinancing opportunities

Balloon can be refinanced if conditions are favorable

Shorter commitment from lender

Lender limits long-term exposure while providing longer payoff terms

⚠️ Key Risks and Considerations

Risk / ChallengeImpact / Mitigation
Refinancing riskBorrower may not qualify for new loan when balloon is due
Interest rate riskFuture rates could be higher when refinancing
Liquidity crunchLarge lump-sum can strain cash if not planned properly
Lender exposureLender must assess exit strategy and repayment capacity

Example Case:    Owner-Occupied Commercial Real Estate Loan

Structure:

  • Loan Amount: $1,200,000
  • Term: 5 years
  • Amortization: 25 years
  • Balloon: Balance due (~$1,000,000) at end of 5th year
  • Use Case: Business buys its office space with plans to refinance after establishing more operating history and cash flow.
  • Why a Balloon?: Keeps monthly payments lower while the business ramps up, but forces a refinancing decision later.
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Best Practices

  • Build in a refinancing plan early — don’t wait until the end.

  • Monitor loan-to-value (LTV) and debt service coverage ratio (DSCR) to maintain refinancing eligibility.

  • Discuss extension or modification options with your lender well before maturity.

  • In some cases, consider fully amortizing alternatives if balloon risk is too high.