What Is Balloon Payment?
With a balloon payment, you make regular payments (often interest-only or partially amortizing) for a set period—5, 7, or 10 years—and then the entire remaining balance is due. You don't pay it off gradually; you refinance or sell before the balloon date. Commercial loans almost always have balloons—10-year term, 25-year amortization, balloon at year 10. Seller-carryback and purchase-money mortgage deals often have 5–7 year balloons. The risk: if you can't refinance (rates spiked, property underperformed) or sell, you're in default. Calendar the balloon date. Start refinance discussions 12–18 months early. Prepayment penalties may apply if you pay early—but at the balloon, you're not paying early; you're paying as agreed. The penalty period is usually over by then.
A balloon payment is a large lump-sum payment due at the end of a loan term. Instead of amortizing to zero, the loan has a shorter term than its amortization schedule—or it's interest-only—and the full principal balance comes due at maturity.
At a Glance
- What it is: Full principal balance due at loan maturity
- Common in: Commercial loans, seller-carryback, hard money
- Typical term: 5–10 years before balloon
- Exit: Refinance or sell before the date
- Risk: Can't refi or sell = default
How It Works
Why balloons exist
Lenders don't want to hold 30-year loans on commercial or seller-carryback deals. They want their capital back in 5–10 years. The balloon payment forces you to refinance or sell—returning their capital. The loan is structured as short-term with a bullet payoff.
Commercial loan structure
Typical commercial loan: 10-year term, 25- or 30-year amortization. Your payments are calculated as if you're paying over 25 years, but the loan matures at year 10. The remaining balance—often 70–80% of the original loan—is the balloon payment. You refinance with a new lender (or the same one) and pay off the old loan. The cycle repeats every 5–10 years.
Seller carryback balloons
Seller-carryback and purchase-money mortgage often have 5–7 year balloons. The seller doesn't want to wait 30 years for their money. You get lower payments (sometimes interest-only) and a balloon at year 5 or 7. You plan to refinance with a bank by then. If you can't, you negotiate an extension with the seller—or you're in default.
Interest-only + balloon
Interest-only loans always have a balloon payment—you've paid no principal, so the full balance is due. The IO period might be 5–10 years. At the end, the entire principal balance is due.
Real-World Example
Roberto has a commercial loan on a 16-unit in San Antonio. Original loan: $1.2 million. Term: 10 years. Amortization: 25 years. Interest-only for the first 5 years, then amortizing for years 6–10. At year 10, the balloon payment is ~$1.05 million.
Roberto starts refinance talks at year 8.5. The property has performed well—NOI is up 15%. He gets a new loan at 75% LTV: $1.35 million. He pays off the $1.05 million balloon and has $300,000 for his next deal. The balloon payment forced the refi—and the refi let him recycle capital. If the property had underperformed or rates had spiked, he might have struggled to refi. The balloon would have been a crisis instead of an opportunity.
Pros & Cons
- Enables commercial and seller-carryback structures
- Lower payments than fully amortizing (especially with IO)
- Forces capital recycling—refi or sell on a schedule
- Prepayment penalty often expires before balloon
- Refinance or sale required—no "pay and hold forever" option
- Refi risk—rates or property can block exit
- Default if you miss the balloon date
- Seller carryback: seller may not extend if you're in trouble
Watch Out
Calendar the balloon: Don't forget. Put it in your deal tracker 18 months out. Start refinance or sale process 12 months before.
Refi readiness: Will the property support a refi at the balloon? Run the numbers: debt coverage ratio, LTV, appraisal. If the property underperforms, you may need to add capital or negotiate with the lender/seller.
Seller carryback extension: If you can't refi, the seller might extend the balloon payment date. They may charge a fee or higher rate. Get it in writing. Don't assume they'll agree—some sellers need the cash.
Prepayment penalty timing: Prepayment penalties often apply for the first 3–5 years. If your balloon is at year 10, you're likely past the penalty. But if you refi early (year 4) to get ahead of the balloon, the penalty may apply. Check your promissory note.
The Takeaway
Balloon payments are standard in commercial loans and seller-carryback. The full principal balance comes due at maturity. Plan your refinance or sale 12–18 months before the date. Don't be caught without an exit—the balloon is a hard deadline.