Possible to refinance balloon payment early?

Question

For example, lets say the original bank loan has the balloon payment due in one year from today.

Would it be possible or prudent in some cases to refinance the loan immediately rather then wait for the balloon payment date to arrive?

Tim Milazzo · Answer

Hi Jason,

The prepayment penalty for a given commercial loan is typically negotiated at the front end. That said, here are some typical structures:

- "Yield Maintenance" - when you prepay, the lender calculates the net present value of the interest they would have received of you held the loan to maturity, maintaining their yield/profit from the loan.

- "Declining" - the lender agrees to a simple schedule of prepayment penalties, often stated year by year. So for a 5 year loan, the schedule might be 5,4,3,2,1, with a few months at the end of the loan where there is no penalty.

- "Lockout" - it's impossible to prepay. This would more commonly be a period early in the loan, rather than the whole term.

- No penalty - there are lenders out there with good rates and no prepay penalties as well.

There's also "Defeasance" which is used to prepay a CMBS loan, but explaining that one would be a longer subject.

Stephanie P. · Answer

Since this is hypothetical, yes, it can be done.  It's all math.  If the prepayment penalty is too high, then you don't refinance it.  If it's reasonable and close to the balloon date, then you refinance.  Some commercial lenders have prepayment penalties around 5% of the outstanding balance where others have a step down prepay.

Stephanie

Jason Kim · Answer

This is just a conceptual question, not one tied to an actual loan I carry.

Jason Kim · Answer

Yes I'm referring to a commercial loan. Do you know what a typical penalty would be?

Daniel Federico · Answer

@Jason Kim

What type of pre payment structure is associated with the current loan you have?

Jaysen Medhurst · Answer

@Jason Kim, I assume you're referring to commercial loan? I thought residential loans couldn't have balloon payments any longer.

It's possible to refinance early. A commercial loan may have a pre-payment penalty attached. The biggest drivers are interest rates and if you need to tap into equity.

If you think interest rates are going to stay steady or decline and you aren't trying to get at some equity, there's really no reason not to wait the year.

Possible to refinance balloon payment early?

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