How to Pay Off a Balloon Payment on a Commerical Loan

Many business owners take on commercial mortgage loans in order to buy their own work facilities and real estate. In some cases, these commercial mortgages will have a balloon payment attached to them – a lump sum payment to repay the balance of the loan after three, five or ten years. Coming up with a chunk of cash that large is virtually impossible for most businesses, but there are several options to make these loans work.

What is a Balloon Payment?

Balloon payments are a way for lenders to reduce their risk and recoup a good portion of their money after a short time. Borrowers pay a set monthly mortgage payment that has been amortized for 30 years or so, but the loan will really come completely due in ten years or less. Banks do not necessarily expect business owners to come up with all that money on their own. Typically, if borrowers do not choose to or cannot repay their loan with cash, they can either sell the property to pay off the commercial mortgage of they can refinance the loan into new terms.

Both options have benefits and risks. Refinancing the loan can be a great solution for borrowers who can qualify for extensions or new mortgage loans, as it lengthens the amount of time required to pay off the balance and can even score borrowers’ lower interest rates. The risk of that route, however, is that if there have been hard times for the business during the initial loan period, the borrower’s credit may also have suffered. A lower credit score may keep the business owner from meeting refinance loan requirements and the property could go into foreclosure.

Selling the property can allow a borrower to pay off the balloon payment, free and clear, but at the cost of the property and daily business site. This may not be so bad for those looking for a change of venue, but in some circumstances, it could make things more difficult for customers who have to go searching for a new location and selling also required the hassle of relocation.

The best strategy is to carefully plan out your repayment plan before even committing to a balloon payment commercial mortgage. If you are already in the middle of one, making your repayment plan now is essential to avoiding disaster when the balloon payment comes due.

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