Property Manager · Baton Rouge, LA · Member since 2017 · 6 posts · 0 votes
I'm researching commercial loans and how they work. I understand that a majority of them carry a 5 year balloon AND an amortization period (usually 30 years). What's the purpose of having the balloon payment? If I refi to a different lender, wont they have a balloon payment period as well?
Financial Advisor · Des Moines, IA · Member since 2017 · 173 posts · 58 votes
8y
@Junaid Anwar - commercial loans come in many flavors. For 1-4 unit properties terms can be 3,5,7,10 even full 30 year fixed. Some balloon and some just become ARMs . It depends on the lender and what programs they offer.
Financial Advisor · Des Moines, IA · Member since 2017 · 173 posts · 58 votes
8y
@Junaid Anwar - commercial loans come in many flavors. For 1-4 unit properties terms can be 3,5,7,10 even full 30 year fixed. Some balloon and some just become ARMs . It depends on the lender and what programs they offer.
Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
8y
The main purpose is that banks are not truly long term lenders. They are funded by short term deposits so they want to make short term loans so they are matching duration of assets to liabilities.
The residential mortgages for the vast majority are being sold off to the agencies or being hedged.
The commercial loans don’t have as large of a secondary market for the banks to sell to so they want shorter paper.
The 20-25-30 amortization is due to the fact that that the properties require it. Most of the time a 5-10 year amortization the property will not cash flow after debt unless the loan to value is sufficiently low, which most borrowers are not looking for.
Life insurance companies on the other hand have longer term liabilities and they look for longer term assets (25-30 year loans) to match that. These are only available for $2m+ institutional quality assets, however.
Property Manager · Baton Rouge, LA · Member since 2017 · 6 posts · 0 votes
8y
@Derek and Ryan,
Thanks for your assists! The information helps clarify some other questions I had. What I am specifically asking is if I have a 30 year loan amortization with a 5 year loan on a 2m+ property, do I have to refinance to another lender at the end of the 5 year term? If I do that, will the new lender now also have a balloon period? How does the cycle end?
Commercial lenders do not have a secondary market like residential lenders do. So, they can't package their new mortgages and sell them to Fannie Mae. So, commercial loans are kept on the bank's balance sheet. That's a lot of risk to take for 30 years.
So, commercial lenders will set 5/10/15/20/25/30 year lending periods on a loan. the interest is amortized as if it was a 30 year loan. But, the loan will come due at the end of the balloon period.
Due to the risk involved, the longer the balloon period the higher the interest rate. So, the best rates are usually with shorter balloon periods like 5 or 10 years.
When the balloon period is coming due, you just reset the balloon period for another period term or refinance with another lender.
the only thing you have to be concerned with would be early payment penalties if you try to refinance too early.