Balloon Payment
A balloon payment is a large, lump-sum payment made at the end of a loan term that is significantly larger than the regular monthly payments. Unlike traditional fully amortizing loans, this payment structure allows borrowers to make smaller periodic payments throughout most of the loan term, but requires them to pay off a substantial portion of the principal in a single final payment. Balloon payments are common in commercial real estate loans, some mortgages, and certain business loans where the borrower expects a large future cash inflow or plans to refinance before the balloon payment comes due.
Consider a hypothetical $10 million office building acquisition:
- Traditional 30-year mortgage: ~$53,000 monthly payment
- 10-year term with balloon: ~$45,000 monthly payment + $8.5M balloon
- Monthly savings: $8,000 ($96,000 annually)
The Mathematics Behind Balloon Payments
Understanding the calculations helps investors evaluate deals more effectively. The monthly payment formula is:
Monthly Payment = (P × r) ÷ [1 – (1 + r)^(-n)]
Where:
P = Principal amount
r = Monthly interest rate (annual rate ÷ 12)
n = Total number of payments (amortization period × 12)
The balloon payment amount equals the remaining principal balance after all scheduled payments have been made.