The payment, and the day the loan comes due

How a commercial mortgage differs from the one on your house

A residential loan amortizes to zero over its own life; a commercial one usually does not. The lender prices the payment on a long schedule — twenty or twenty-five years — but ends the loan on a short one, commonly five, seven or ten. The result is the "25 due in 10": a payment sized as if the loan ran a quarter century, and a maturity in year ten at which the entire remaining balance — the balloon — comes due at once. On the default above, that is a $7,068 payment for 120 months and then roughly $786,000 due on month 121. Nobody plans to write that check; the plan is to refinance into the next loan, and the balloon is the size of that bet.

How the numbers are computed

The payment is the standard level-payment formula on the amortization period: payment = P·r(1+r)ⁿ ⁄ ((1+r)ⁿ−1), with P the loan, r the monthly rate and n the amortization in months. The balance then walks forward month by month — each payment's interest is the rate on what is still owed, the rest retires principal — and the balloon is simply the balance standing when the term ends. Interest paid by maturity totals the interest portion of every payment made to that point. Set the term equal to the amortization and the balloon collapses to zero: a fully-amortizing loan, the higher-payment-no-maturity-risk end of the same trade.

The loan constant, and why underwriters quote it

The fourth figure — annual debt service divided by the loan amount — is the loan constant, and it is the debt's true carrying cost with rate and amortization collapsed into one number. It is built to compare against the cap rate: buy at a 6.5% cap with money at an 8.5% constant and every borrowed dollar consumes more cash than it produces, whatever the interest rate alone implies. Positive leverage begins where the cap rate clears the constant. The constant also exposes what amortization does to cash flow — the same 7% money costs about 8.5% a year to carry on a 25-year schedule and about 9.3% on a 20 — which is exactly the trade a term sheet is asking you to price.

Common mistakes

The expensive ones cluster at the maturity. Treating the balloon as a formality assumes year-ten rates, values and coverage requirements cooperate; 2022–23 taught a generation of owners that they sometimes do not, and a DSCR that clears today's test can fail the refinance's. Assuming a 30-year amortization because the house loan had one overstates cash flow on day one. Comparing loans by interest rate alone hides what a shorter amortization does to the payment — the constant is the honest comparison. And after closing, the schedule is only as true as the records: rate resets, recasts and the refinance itself all move the balance, which is what a proper loan history keeps straight.

The balloon is one loan's cliff; a lender sizing the refinance will read your whole position. The free Schedule of Real Estate Owned generator assembles it — every property, balance and payment — in the format the application asks for.