The direct answer
Commercial loans can combine an amortization schedule longer than the contractual loan term, creating a balloon balance at maturity. They can also include interest-only periods before amortization begins. These structures change debt service, refinance risk and the balance remaining at exit.
Separate term from amortization
A 10-year loan can amortize over 25 or 30 years, meaning scheduled payments do not fully repay principal by maturity. The remaining balance becomes due or must be refinanced.
To apply the approach to an editable scenario, use the Debt Yield Calculator. For the neighboring question, explore Commercial Real Estate Investment Calculator.
Model interest-only periods explicitly
During an interest-only period, scheduled payments may not reduce principal. When amortization starts, debt service can increase even if the note rate is unchanged.
Track the maturity balance
Exit and refinance analysis should include the actual remaining loan balance, not just the original principal or an assumed straight-line reduction.
Worked example
A commercial loan may have a 10-year term, 25-year amortization and two years of interest-only payments. The borrower can face a substantial balloon balance at year 10 because the loan was never scheduled to fully amortize within the term.
Common mistakes and limitations
Do not assume the loan term and amortization period are the same or that interest-only payments build principal equity.
Debt yield is not DSCR or LTV and does not incorporate interest rate or amortization.
Frequently asked questions
What is a balloon payment?
It is the remaining principal due at maturity when scheduled payments have not fully amortized the loan.
Does interest-only mean no principal is ever repaid?
Not necessarily. Many loans have an initial interest-only period followed by amortizing payments.
Sources and further reading
The article’s examples are illustrative arithmetic. The references below provide context for operating, valuation or transaction concepts; they do not endorse the assumptions or the calculator.
- Office of the Comptroller of the Currency — Comptroller's Handbook — Commercial Real Estate LendingNOI, direct capitalization, cap-rate valuation and DCF concepts for commercial real estate.
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