How to use the balloon payment calculator
The calculator opens with a typical commercial property loan: $750,000 at 7%, with payments based on a 30 years schedule and the balance due after 7 years.
- Loan amount and interest rate from the term sheet or loan agreement.
- Amortization period: the term the regular payment is calculated over, often 25 or 30 years. It is longer than the time you actually have the loan.
- Balloon due after: the maturity, when the remaining balance must be repaid. Commercial loans commonly mature after 5, 7 or 10 years.
- Regular payments: principal and interest, or interest only. Interest-only loans repay nothing until the end, so the balloon is the full loan.
- Refinance rate, optional. Enter the rate you think you could get at maturity to see the payment on the new loan.
The chart shows the balance falling slowly until the balloon date, marked with the amount due; the dashed line continues the full amortization schedule for comparison. The table gives the figures year by year.
How the balloon is calculated
The regular payment comes from the standard amortization formula, using the long amortization period:
The balloon is the balance still owed after k payments, where k is the number of months until the loan matures:
A worked example
A $750,000 loan at 7%, amortized over 30 years, has a monthly payment of $4,989.77.
Over 7 years you make 84 payments totaling $419,140.57. Because a 30-year schedule repays very little principal in the early years, $352,746.18 of that is interest and only $66,394.39 reduces the loan.
When the loan matures, $683,605.61 is due in one payment, 91.1% of the original amount. Refinancing that balance at 8.5% over the remaining 23 years would cost $5,647.17 a month.
How much of the loan is still owed
The balloon depends mostly on how long the loan runs and how long the amortization schedule is:
| Loan structure | Monthly payment | Balloon due |
|---|---|---|
| 30-year amortization, due in 5 years | $4,989.77 | $705,986.92 |
| 30-year amortization, due in 7 years | $4,989.77 | $683,605.61 |
| 30-year amortization, due in 10 years | $4,989.77 | $643,592.88 |
| 25-year amortization, due in 7 years | $5,300.84 | $650,009.79 |
| Interest only, due in 7 years | $4,375.00 | $750,000.00 |
Even after ten years of payments on a 30-year schedule, most of the loan is still owed. A shorter amortization period raises the payment but repays more principal before maturity, which lowers the balloon and makes refinancing easier. Interest-only payments keep the payment lowest and leave the whole loan to repay at the end.
Refinancing risk
A balloon loan is a bet that you will be able to repay or refinance the balance when it falls due. Three things can make that harder:
- Higher rates. If rates have risen, the new loan costs more. Refinancing the example balloon at the same 7% over the remaining 23 years keeps the payment at $4,989.77; at 10% it rises to $6,338.27.
- A lower property value or weaker income. Commercial lenders size new loans on the property’s value and its income, measured by the loan-to-value ratio and the debt service coverage ratio. If either has worsened, the new loan may be smaller than the balloon, and the borrower has to make up the difference.
- Tight credit markets. In a downturn, lenders can stop refinancing whole categories of property, regardless of the borrower’s record.
Borrowers usually start working on the refinance a year or more before maturity, and check whether the loan carries prepayment penalties or defeasance costs that limit refinancing early. Some loans include an extension option, typically at a fee and with conditions.
Where balloon loans are used
Commercial real estate is the main home of balloon loans. Office, retail, industrial and apartment loans from banks, insurance companies and commercial mortgage-backed securities lenders often amortize over 25 or 30 years and mature after 5, 7 or 10. Investors expect to refinance or sell before then.
Car and equipment financing sometimes uses a balloon to lower the monthly payment. On a $30,000 car loan at 7% with payments based on six years but due after four, the payment is $511.47 and $11,423.74 is left at the end. The buyer then pays it, refinances it, or trades the car in, which works only if the car is worth more than the balloon.
Home loans with balloons were more common before 2014. Under US Qualified Mortgage rules most lenders no longer offer them, with limited exceptions for some small lenders.
What this calculator does not include
- Fees and prepayment costs: origination fees, exit fees, yield maintenance and defeasance are common in commercial loans and can be large.
- Variable rates. Many commercial loans float with a benchmark rate; this calculator assumes a fixed rate.
- Day-count conventions. Some commercial loans charge interest on an actual/360 basis, which makes the true interest slightly higher than a 30/360 schedule like this one.
- Refinancing terms other than the rate: a new lender may require a lower loan amount, fees or reserves.
The loan agreement defines the exact maturity amount; use this calculator to understand the structure and to test refinancing scenarios.