Most people buying their first small apartment building expect the loan to work like the one on their house: pay it every month for 30 years and it is gone. On five units and up, that is usually not the deal. The payment is worked out over 30 years, but the loan itself ends in five, seven or ten, and whatever is left is due that day.
What is a balloon payment on a mortgage?
The Consumer Financial Protection Bureau puts it in one line. A balloon payment is "a large, one-time payment at the end of the loan term".
It exists because two different clocks are running. One is the amortization, the schedule that works out your monthly payment by pretending the loan will take 30 years to clear. The other is the term, the date the lender wants its money. When the term is shorter than the amortization, the schedule has not finished, and the gap is the balloon.
You rarely pay it out of pocket. You refinance the balance into a new loan, or you sell the building. Either way the date is fixed by the note, not by you, and the rate you get on that day is whatever rates are then.
On a loan for a house you live in, this structure is mostly gone. The CFPB says balloon payments are "not allowed in loans deemed a Qualified Mortgage, with some limited exceptions". Those protections were written for consumer mortgages. A loan on an apartment building is commercial lending, and the shape of it is set by what the lender wants rather than by that rule.
Why would a loan be written this way?
Because the lender is pricing the building, not you, and it does not want to hold one bet for 30 years.
Freddie Mac’s conventional fixed-rate multifamily loans show the pattern plainly. Its term sheet, dated April 2026, offers 5 to 10 year terms with a maximum amortization of 30 years, a minimum amortizing debt coverage ratio of 1.25x, and a maximum loan-to-value of 75% on a five-year term. That program has a $10 million minimum, so it is not the loan on a six-unit building, but it shows the shape clearly: a long payment schedule sitting on a short note.
Five units is where the switch happens. Fannie Mae buys mortgages on residential property only when the dwelling consists of one to four units, so a fifth unit puts the building outside the ordinary home loan market. What is left is commercial lending, which sizes the loan against what the building earns rather than against your income, and ends the note early. The multifamily calculator follows that line: raise the unit count to five and it sets a lender minimum DSCR of 1.25 and fills in “Note comes due in” with 5 years. Both sit under Financing, and you can change either. For what else changes at that line, see how to buy a 5 unit apartment building.
A worked example: six units at $749,000
Take a six-unit building at $749,000 with all six let at $1,575 a month, which is $9,450 of scheduled rent. Vacancy is set at 6%, property taxes at $6,400 and insurance at $3,600 a year, utilities at $450 a month, with 5% of rent for repairs, 5% for replacements and 8% for management. Buying costs are 3% of the price.
With 20% down that is $149,800 plus $22,470 of closing costs, so $172,270 of cash in, against a $599,200 loan at 7%. The payment, worked out over 30 years, is $3,986 a month. Net operating income is $70,784 a year, cash flow is $1,912 a month, and the debt service coverage ratio is 1.48, comfortably above the 1.25 a commercial lender tends to ask for.
Now look at where that loan stands when the note comes due in year five.
| Over five years | |
|---|---|
| Interest | $204,026 |
| Principal | $35,164 |
| Paid to the lender | $239,190 |
These are example figures, not a quote.
Five years of payments, $239,190 handed over, and $35,164 of the loan retired. The balance on the day the note comes due is $564,036. That is the number the calculator shows under “Still owed when the note comes due”, and it is 94% of what you borrowed.
Early payments are nearly all interest, which is true of any mortgage. What is different here is that the loan ends while that is still the case.
What happens when the note comes due?
You refinance $564,036 over the remaining 25 years of the schedule, at the rate available that year. The building has also grown into the loan a little: at 3% a year the example values it at $868,296 in year five, so the balance is 65% of value, inside the loan-to-value most lenders want.
Here is what the new rate does to the payment, and to cash flow the year after.
| Rate | Monthly payment | Change | Cash flow in year 6 | |
|---|---|---|---|---|
| 7% | $3,986 | no change | $30,313 | |
| 8% | $4,353 | +$367 | $25,911 | |
| 9% | $4,733 | +$747 | $21,351 |
Two points above the old rate costs $747 a month, $8,963 a year. The building still carries it, but look at what it costs: cash flow in year six is $21,351, below the $22,946 the building earned in year one. Five years of 2% rent growth added $7,367. Two points of rate took $8,963. Run your own deal two or three points above today’s rate and see whether it still covers the payment, because that is the version you may actually own in year five.
What can go wrong on the date the note comes due?
Three things, none of them about the building falling apart.
- Rates are higher. The payment resets and cash flow drops, as in the table. This is the ordinary case and the one to plan for.
- The building is worth less. A commercial lender sizes the new loan on income and value. If either has slipped, the loan it offers may be smaller than the balance, and you pay the difference in cash to close.
- Income has slipped. Lose a unit or two to vacancy in the year you are refinancing and the debt coverage ratio falls with it, which can shrink the loan on offer even if nothing is wrong with the market. Lenders look at recent operating figures, so the months before the note comes due are the wrong time to have empty units. See what counts as a good DSCR for how that ratio is read.
The protection against all three is time and reserves. Nothing stops you refinancing early if rates fall, although the note may charge you for it.
What to check on a note before you sign it
Four lines decide how much a balloon can hurt you: the term, the amortization, the prepayment penalty, and whether there is any option to extend. Ask for them in writing, and ask what the lender would require to refinance at maturity, rather than assuming it will simply roll.
Then put the real term in the model. Open the multifamily calculator, enter the rent roll, set “Note comes due in” to the year on the note, and read what is still owed that year. If that figure only works at today’s rate, you have a five-year deal rather than a 30-year one. To get the rent side right first, see how to read a rent roll.