Commercial Mortgage Calculator

The balloon mortgage structure that shapes commercial real estate

Commercial mortgages almost always have a mismatch between loan term and amortization period. A typical loan might be "10-year term, 25-year amortization." The monthly payment is calculated as if you were paying off the loan over 25 years, but the lender expects the entire remaining balance, the balloon, at the end of year 10. You then refinance, sell the property, or pay off the balloon in cash.

Why the structure? Lenders limit their interest-rate risk by re-pricing the loan every 5-10 years. They also limit their default risk by forcing the borrower to "prove" the property is still bankable at refinance. For borrowers, the lower payment of 25-year amortization makes properties more profitable on a cash-flow basis than they would be at 10-year amortization.

The risk for borrowers is "balloon risk", what if you can't refinance at term? Property values may have dropped, the credit market may have tightened, the property's cash flow may have weakened, or your personal financial situation may have changed. Commercial lenders have refused to refinance well-performing properties during credit crunches (2008-2009, briefly 2023), forcing some borrowers into forced sale or bankruptcy. Always have a "Plan B" for the balloon.

DSCR and underwriting: the math that wins loans

Debt Service Coverage Ratio (DSCR) is the dominant metric for commercial lending. DSCR = Net Operating Income ÷ Annual Debt Service. NOI is rental income minus operating expenses (property tax, insurance, maintenance, management, vacancy reserve, but NOT mortgage payments or capital improvements). Annual debt service is your loan payment × 12.

Most lenders require DSCR of at least 1.25x. A property with $150,000 annual NOI can support about $120,000 in annual debt service ($10,000/month). At 8% interest with 25-year amortization, that's roughly a $1.55 million loan. If the property costs $2 million, you need at least $450,000 down (22.5%), though most lenders push for 25-35% to maintain a safety margin.

Better DSCR earns better rates. A 1.5x DSCR property might get 25 basis points lower rate than a 1.25x property. Over 25 years on a $1.5M loan, that's $30,000-50,000 in interest savings. Improving NOI before financing (raising rents to market, cutting expenses, signing long-term tenants) directly translates to financing savings.

Commercial loan types: which fits your deal

• Conventional bank loan: Traditional bank or credit union. Best rates for strong borrowers with good banking relationships. Local lenders especially competitive for smaller deals ($500K-$5M).
• SBA 7(a) or 504: Government-guaranteed loans for owner-occupied properties (51%+ use by your business). Lower down payment (10-15%), longer terms, sometimes lower rates. Slow to close (60-120 days).
• CMBS (commercial mortgage-backed securities) / conduit loans: Loans packaged and sold to investors. Best for $1-30M deals with stabilized cash flow. Non-recourse but with prepayment lockouts (5-10 years).
• Life insurance company loans: Largest insurers (MetLife, Prudential, Nationwide) make CRE loans on premier properties. Lowest rates available for $5M+ deals on Class A properties. Conservative underwriting.
• Hard money / bridge loans: Short-term (12-24 months) at 9-15% from private lenders. Used for renovation projects, distressed acquisitions, or to bridge to permanent financing. Expensive but fast (close in 7-21 days).
• Debt funds: Private debt funds offering 6-9% bridge or mezzanine. Used to fill gaps in capital stack, fund value-add renovation, or acquire properties not yet stabilized.
• Agency loans (Fannie/Freddie multifamily): Available for 5+ unit apartment buildings. Excellent rates and terms for stabilized multifamily. Lower DSCR requirements than conventional (1.20-1.25x).

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