A large final payment of remaining principal at loan maturity.
A balloon payment is a large lump-sum payment of remaining principal owed at the maturity of a loan that did not fully amortize over its term. Balloon structures are universal on commercial real estate loans (5, 7, 10-year terms with 25–30 year amortization) where the borrower plans to refinance or sell the property before maturity.
Balloon loans solve a specific problem: commercial lenders want to limit their interest-rate exposure to 5–10 years, but commercial properties need 25–30 year amortization to produce meaningful DSCR. The compromise is a structure where the loan amortizes as if it were 30 years (low monthly payment) but matures at year 5, 7, or 10 (limiting the lender's rate exposure). The borrower owes the unpaid balance — the "balloon" — at maturity.
For a typical commercial balloon — 10-year term, 30-year amortization, 7% rate — the borrower pays interest and principal as if on a 30-year schedule for 10 years, then balloons the remaining balance. After 10 years of a 30-year schedule at 7%, about 85% of the original principal is still outstanding. The balloon payment on a $5M loan would be about $4.25M.
The exit on a balloon is always either refinance or sale. Borrowers don't typically have $4.25M sitting around to write a check — they refinance into new debt or sell the property. Refinance risk is real: if rates have risen materially or DSCR has weakened, the new loan size may be smaller than the balloon, requiring the borrower to bring cash. This is exactly what happened to many CRE borrowers in 2023–2024 as rates spiked.
For residential investors, balloon structures show up less often. Most DSCR and conventional rental loans are fully amortizing over 30 years with no balloon. But hybrid products (5/1 ARMs, 7/1 ARMs) effectively introduce balloon risk: rate resets after the fixed period can cause payment jumps that operate similarly to a refinance demand. The principle is the same — manage the maturity / reset risk at origination, not the day it hits.
| Loan amount | $3,500,000 |
| Rate / amortization | 7.0% / 30-year |
| Term | 10 years (balloon) |
| Monthly P&I | $23,288 |
| Total payments year 1–10 | $2,794,560 |
| Total interest paid year 1–10 | $2,239,170 |
| Total principal paid year 1–10 | $555,390 |
| Balloon at year 10 | $2,944,610 |
| % of original principal owed | 84.1% |
A large final payment of remaining principal owed when a partially amortizing loan reaches maturity. Common on commercial loans with terms shorter than the amortization period.
Lenders limit their rate-risk exposure to 5–10 years while still letting the loan amortize on a 25–30 year schedule (lower monthly payment, better DSCR). Borrowers refinance or sell before the balloon hits.
The borrower must either bring cash to pay off the balance, negotiate an extension with the lender, sell the property, or accept foreclosure. Most balloon defaults during high-rate environments get worked out through forbearance or sale.
No — most residential mortgages are fully amortizing 30-year fixed loans. Balloon structures are common in commercial real estate and some non-QM programs but not standard residential.
For a 10-year balloon on 30-year amortization at 7%, roughly 84% of the original principal is still owed. The exact percentage depends on rate and amortization length.
Matrix structures commercial refinances and bridge takeouts for borrowers facing balloon maturities. Fast execution, realistic underwriting.
