Say you borrow $10.0M at 6.50% on a 30-year amortization, and the loan comes due in 5 years. Each payment is part interest on what you still owe and part principal, so the balance falls slowly at first and faster later. When the loan comes due, whatever is left is the balloon: $9.36M here. Drag the rate, the amortization, and the term and watch the balloon change.
The payment and the balloon
Monthly payment$63.2K$758K a year
Balloon at year 5$9.36M94% of the loan
Paid down over 5 years$639K6% of the loan
Interest over 5 years$3.15M83% of what you paid
The outstanding principal balance, year by year. The blue bar at the dotted line is the balloon, and the dotted curve is the rest of the schedule.
Comes due at year 5Due: year 5Paid off at year 30 if it ran the full schedulePaid off: year 30
Outstanding principal balance
$0$2.5M$5.0M$7.5M$10.0M
Balloon$9.36M
The faint bars never happen: the loan comes due first.Faint bars: after the loan comes due
Total loan payment
$758KInterest paymentPrincipal payment
051015202530Time (years)
Interest paymentPrincipal payment
6.50%Sets the payment: $63.2K a month, $758K a year.
30 yearsIn its first paydown year $112K comes off the loan.
5 yearsWhat is left when it comes due, $9.36M, is the balloon.
noneEvery payment pays the loan down from month one.
What just happened
Every month you pay $63.2K, the payment that would clear $10.0M at 6.50% over 30 years. In year one $647K of the $758K is interest and $112K pays the loan down. Each year the balance is a little lower, so the interest is a little less and more of the same payment goes to principal: by year 5 it is $614K of interest and $145K of principal. Then the loan comes due. You have paid $3.79M and the balance has only dropped to $9.36M, so $9.36M is due at once: the balloon. You refinance it or sell the building to pay it. If the loan ran its full schedule the balance would reach zero in year 30.
What $1 a month carriesat 6.50% over 30 years, 360 payments$158.21 of loan
The paymentthe loan divided by what $1 carries$10.0M ÷ $158.21 = $63,207 a month
First month’s interestthe balance times the monthly rate$10.0M × 0.542% = $54,167
First month’s principalthe payment minus the interest$63,207 − $54,167 = $9,040
The balloonwhat the schedule still owes at the end of the term, month 60 of 360$9.36M
Paid down over the termthe loan minus the balloon$10.0M − $9.36M = $639K
Interest over the termeverything paid minus what came off the loan60 × $63,207 − $639K = $3.15M
The payment is sized as if the loan ran the whole amortization, so a 30-year amortization on a 5-year loan means a small payment and $9.36M still there when it comes due. Interest-only years come first and push the schedule out by the same number of years. Fees, taxes, and prepayment penalties are left out on purpose.
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