I'm having trouble trying to wrap my head around commercial loans. I read a couple articles but I can't seem to understand the 25 years amortize and the balloon payments. Any links to an example would be tremundus help. Thanks again BP nation!
Your payment and interest are setup as if you have a full 25 year loan. At the balloon year, you have to pay what ever is left on the principal. Your balloon term is typically 3,5,7, or 10 years
In commercial the loans are generally much bigger. The lenders do not want to loan out generally more than 10 years for a loan being due but will go up to sometimes 25 to 30 year amortization on the repayment schedule.
There are some loans that go out past that but interest rate tends to be much higher for a lender to lock in a rate fixed for that long. It's not the same as SFR with Fannie and Freddie money.
There are some long term loans more than 10 years in multifamily but they tend to take a long time to close and have lot's of conditions to meet.
Google 'Amortization Calculator Excel'. This will let you input original loan balance, interest rate, etc. Amortize to 25 years (meaning that the spreadsheet will calculate interest and principal payments so that the principal shows paid in full at the end of 25 years.) Once you have that, than look at the end of year ten (which is probably the loan term that your lender will give you). That remaining amount of principal at the end of year ten will be DUE IN FULL at your loan maturity (Balloon Payment). I can help you run some numbers if this was not helpful enough.
In Excel you use the PMT function to calculate the payment using the loan amount, interest rate and amortization period. Then, having calculated the payment, you can calculate the balance at some point in the future using the FV (future value) function. For the FV function, you input the loan amount, interest rate, the previously calculated payment and the balloon period to calculate the balance when the loan balloons.
More generally, there are five Excel functions relevant for loans that will calculate one of the five parameters for a loan, given the other four:
- PMT - calculate a payment from present value (loan amount), future value (balloon, though typically you put 0 when doing this calculation), interest rate and term
- FV - future value, calculate loan balance given the other four. Useful in this case. Also useful if you're trying to estimate a loan balance
- PV - present value, useful to calculate when you would pay to buy a lone (aka "buy a note".)
- RATE - can calculate the interest rate if you know the other four parameters
- NPER - calculate the number of payments from the other four
Its worth your while to figure out how to make these functions work. A pre-canned spreadsheet is all well and good. But this is math you need to understand.
30 year fixed rate loans exist in the residential space only because of government policies. Left to themselves, lenders would only do balloon and variable rate loans even for residential loans. Think about it, would you lend out several hundred thousand dollars at todays interest rates and lock that in for 30 years? I wouldn't.
Thank you everybody for your feedback!! Definitely answered majority of the questions that I had. @Jolene Desmond I'll PM you.
I'm a credit analyst for a commercial bank. I spend all day putting these deals together for my bank. If you have any other questions, let me know.
@Mark Brooks Great!! I'll PM you.