Many commercial loan products have Balloon Payments. The lender fixed the interest rate for an initial period of time. Consequently, the remaining principal balance is due at the end of the term. When the final balloon payment is due at the end of the term, the borrower basically has three choices.
The borrower can:
- Pay the balance in full
- Sell the property
For example, let’s say that you had a 7-year fixed rate, commercial mortgage with an interest rate of 7.5%. Your interest rate would remain constant for the full 7-year term. Then, at the end of 7-year term, the remaining principal balance would become due and payable in full. That is what is known as a balloon payment.