Confused about commercial loans can someone help me understand

[Skip Gilliam]

I am looking at a mixed use building with retail/office bottom floor and apartment upstarts as residential. I called by local bank that I've used for mortgages on personal homes and a construction loan to build. He told me that they require 15% down and would be 4.5% on a 20year term with a 5 year balloon where the remaining balance would be called/due after year 5. He also said that the option to refinance is there after the 5th year but no guarantee. Can someone clear this up for me please?

[Jon Holdman]

What are you unclear about?  This is typical for commercial loans.  The payment is calculated based on a 20 year term.  But, unlike a 20 year fixed rate loan, the loan is due after five years.  So, for example, if you take out a $1 million loan at 4.5% with a 20 year amortization period your monthly payment (P&I) would be $6326.49.  After five years you would have a principal balance of $826,999.90.  You would need to pay off this loan or refinance it.  You might, or might not, be able to refinance with the same lender.  You might have to find a different lender.  Or you might have to sell.  If you cannot sell, refinance or pay off the loan, the lender would foreclose and you would lose the property.

I'm in a mini-storage deal where we came very close to losing the property when the original loan ballooned.  We had to do a cash-in refi because the new lender would not loan enough to fully pay off the original loan.  And we paid for several extensions on the original loan to give us enough time to refinance.

Prepayment penalties are also common on these loans.