Balloon Payment

Bank examiners, consumer rules and the agency guide all describe the same thing.

The OCC's Commercial Real Estate Lending handbook defines a balloon payment as the payment required at the end of the term to repay the remaining principal of a loan that does not fully amortize over its term. 12 CFR 1026.18(s)(5), the consumer disclosure rule, defines it as a payment more than two times a regular periodic payment and requires it to be shown separately.

The Fannie Mae Multifamily Guide sets the expectation for a balloon mortgage: the borrower refinances or pays off the loan on or before maturity, and failure to do so is a default that puts the borrower at risk of the lender exercising its remedies under the security instrument.

A CMBS prospectus filed with the SEC in 2025 notes that most loans in its pool have amortization schedules much longer than their terms, and that a borrower's ability to pay at maturity usually depends on refinancing or selling, which turns on interest rates, the property's income and its value at the time.

A hypothetical: what is left after ten years.

Hypothetical figures: a $4,000,000 loan at 6% with a 10-year term and 30-year amortization has a monthly payment of about $23,980. After ten years of payments, about $3,350,000 is still owed, and that is the balloon. Had the loan been interest-only for the whole term, the balloon would be the full $4,000,000.

If values or lending conditions have moved against you by year ten, the sale or refinance has to cover that balance anyway. A property bought at a high loan-to-value, or one whose income has slipped, may not support a new loan large enough to repay it, which is when owners end up selling on the calendar rather than the market. Run your own numbers with your CPA.

It bites on DST hold periods and on the timing of your own sale.

In Rev. Rul. 2004-86 the trust's 10-year loan matched its 10-year life, and the trustee may not renegotiate or refinance the debt. A trust facing maturity generally has to sell, which sets the exit and the next exchange described in the DST sale and your next 1031. Limits on getting out earlier are in DST illiquidity and exits, and the conversion some trust agreements allow is in the DST springing LLC.

For your own property, an approaching balloon is often what forces a decision between refinancing and selling. Selling into an exchange retires the balloon from proceeds, and the debt you shed has to be matched on the replacement side; refinance timing and the 1031 compares the sequences.