A balloon payment occurs when the amortization schedule is longer than the loan term. To use an example, let’s say a borrower has a $1 million commercial loan with a term of 7 years at a 7% interest rate, with an amortization period of 30 years: The borrower would repay the loan for seven years at an amount based on the loan being paid off over 30 years – so the borrower would make monthly payments of $6,653.02 for a full seven years.
At the end of the 7-year term, the borrower would make one final “balloon” payment of the entire remaining balance on the loan. A final balloon payment of $918,127.64 would pay off the loan in full.
The larger the differential between your loan term and your amortization period, the larger the balloon payment you will need to make at the end of your loan term. That can potentially put you at risk of needing to refinance the property.