The final payment on a loan. In commercial real estate, the balloon payment is the entire outstanding balance of the loan as of the loan maturity date. A balloon payment is only due when the loan has not fully amortized.
For instance, a lender extends a mortgage loan of $10,000,000, for a term of five years, with interest-only payments for the entire five years. The balloon payment at loan maturity will be $10,000,000.
In another example, a lender extends a mortgage loan of $10,000,000, for a term of 10 years, with payments amortized over 30 years. While the loan is amortizing, it will not be fully amortized at loan maturity (year 10) and thus the borrower will owe a balloon payment for the balance due.
When underwriting a perspective loan, real estate lenders take special care to analyze the likelihood the borrower will be able to payoff the balloon payment at maturity. They use tools such as refinance analysis risk models to assess whether a payoff of the balloon balance is likely.« Back to Glossary Index