The Quick Read: Usually, yes, but it is a brand-new loan, not a swap. The new loan pays off the balloon note and is judged on the rent, the appraised value, and your credit and reserves, not on the old loan’s structure. Approval is never guaranteed and stays subject to lender guidelines.
- The old balloon payment does not count against you. The new payment sets the coverage ratio.
- Rate-and-term refinances (payoff only) get more leverage than cash-out refinances.
- Cash back at payoff turns the file into a cash-out, with a lower leverage cap.
- A low appraisal or thin rent is a common reason the plan stalls.
- Start well before maturity so you have a second attempt if the first one fails.
What a Balloon Loan Is and Why Landlords Take Them
A balloon loan has small regular payments and one big lump sum due at the end. The lump sum is the “balloon.” The CFPB describes it as a final payment generally more than twice the average monthly payment, and says balloon terms often run 5 to 10 years, against 15 to 30 for traditional mortgages.
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Landlords take balloons because the early payments are lower and the approval can be easier. A seller may finance the purchase. A local bank may offer a short term on a rental. A hard-money lender may fund a rehab. The plan is always the same: refinance before the lump sum is due.
That plan carries risk. Cornell’s Legal Information Institute notes that balloon mortgages are most common in commercial lending, and that the strategy becomes precarious if the borrower cannot refinance. The CFPB adds that refinancing may not work if the property’s value drops or your finances decline.
A fixed DSCR loan is the usual exit. DSCR stands for debt service coverage ratio. It compares the property’s rent to its full monthly payment. That payment is called PITIA: principal, interest, taxes, insurance, and any HOA dues. For the full picture, see Lendmire’s complete DSCR loans guide.
Why It Is a New Loan, Not a Swap
You cannot convert a balloon note into a fixed loan. Nobody edits the old contract. A DSCR lender writes a fresh first-lien loan, and the proceeds retire the balloon note. The old lender is paid off. The balloon disappears.
That has one big consequence: the lender underwrites everything again. Expect an appraisal, leases or a rent roll, bank statements, and entity documents if an LLC holds the property (subject to lender program eligibility). DSCR loans are designed for non-owner-occupied investment properties, so a primary residence does not fit.
DSCR loans qualify primarily on property-level rental income covering the payment, subject to lender guidelines. They still look at credit and reserves. Most programs across our wholesale network want a score around 660. A 620 floor exists in parts of the network, and 700 or more unlocks the strongest leverage tiers.
The Step-by-Step Flow
1. Read the balloon note. Find the maturity date, the amortization, any prepayment charge, and any extension option.
2. Order a payoff statement. It includes accrued interest and any exit fees.
3. Pick the refinance type. Payoff only, or cash-out. More on that below.
4. Submit the file. The lender orders an appraisal to set value and the maximum loan amount.
5. Check the ratio. Rent is divided by the new loan’s PITIA.
6. Close and pay off. The new loan retires the balloon note. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Start early. A reasonable window is six to nine months before maturity. That leaves room to season the loan, fix an appraisal problem, or try a second lender. The CFPB makes the same basic point: think about how you will meet a balloon before it comes due.
Why the New Payment Decides Everything
Many landlords worry that their old payment will hurt the coverage number. It will not. The old loan’s payment is gone at payoff. Only the new loan’s PITIA goes in the denominator.
This is where a fixed, fully amortizing loan can help or hurt. Think of it in ratios, not dollars. Say a rental covers an interest-only balloon payment at about 1.4x. Switch to a fully amortizing 30-year loan, and the payment includes principal, so coverage may slip toward 1.1x. Same rent, same property, different ratio.
The reverse also happens. A balloon built on a short amortization can carry a heavy payment. A 30-year fixed term stretches it out, which often improves coverage. A longer term, such as 40 years, is available through select lenders in the network.
One more caution. Clearing 1.00 is not the same as positive cash flow. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses sit outside the calculation. A rental can pass the test and still be thin in real life.
On coverage itself: 1.00 is where many select programs start. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted. Stronger ratios open better leverage and pricing.
Payoff-Only or Cash-Out?
The category you land in sets your leverage cap. Here is how the two compare on investment property across most programs in our network.
| Factor | Payoff-only (rate-and-term) | Cash-out |
|---|---|---|
| Cash back to you | None | Yes |
| Max leverage | Up to 85% LTV | About 75% LTV |
| Seasoning | Lighter scrutiny | About 6 months typical |
| Best for | Retiring the balloon | Pulling equity too |
LTV means loan-to-value: the loan amount divided by the appraised value. The 85% rate-and-term figure applies on select programs, and most files land lower. Expect reserves of about 6 months of PITIA, and about 9 months on loans above $1,500,000. Conservative rate-and-term files at modest leverage under $1,500,000 can see reserves waived. Reserves vary by lender, leverage, loan size, and transaction type.
Here is the trap. The loan only counts as payoff-only if the proceeds cover the balloon, accrued interest, and closing costs. Meaningful cash back at closing generally reclassifies the whole file as a cash-out. Then the lower cap and the seasoning rules apply to everything. Plan the loan amount to the payoff, not to the maximum.
For the cash-out side, see Lendmire’s page on DSCR cash-out refinance.
Which Balloon Do You Have?
The source of the balloon changes the details.
| Balloon source | What to watch |
|---|---|
| Bank or local lender | Check prepayment charge and extension option |
| Seller-financed note | Check the note for a prepayment penalty |
| Hard money | Seasoning clock runs from the purchase recording |
| Existing DSCR loan | A prepayment charge may apply on payoff |
Hard-money balloons deserve special attention. Delayed financing is built for all-cash buyers, so it generally does not fit a hard-money purchase. A hard-money buyer usually chooses between a standard cash-out after seasoning and a payoff-only refinance. If your balloon is short, say six months, the seasoning clock may only clear right at maturity.
Seasoning is the waiting period a lender wants between buying a property and refinancing it. It generally runs from the date the purchase was recorded. If the clock is the problem, an extension from the balloon lender is a reasonable backup.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
What Can Go Wrong, and the Fix
| Problem | Effect | Typical fix |
|---|---|---|
| Low appraisal | Smaller loan than the payoff | Bring cash, or appeal with comps |
| Thin rent | Coverage under 1.00 | Smaller loan, or a select-lender sub-1.00 path with adjusted leverage and terms |
| Payoff near the cap | No room for cash-out | Payoff-only structure |
| Vacant unit | No rent to test | Lease it first, or ask about a select-lender no-ratio path |
| Recent purchase | Seasoning not met | Payoff-only, or extend the balloon |
| Credit slipped | Lower leverage tier | Pay down debt, then reapply |
The no-ratio path is available only through select lenders, generally for borrowers who already own a primary residence. Pricing and leverage differ from standard files.
Value drops are the scariest failure. If the property is worth less than when you bought, the new loan may not cover the payoff. You then bring cash to closing or find another exit. The CFPB warns that failing to make a balloon payment can lead to foreclosure. That is the reason to start early, not at the last minute.
One practitioner pattern shows up again and again. Files that stall rarely fail on credit. They stall on the appraisal, or on a lease that is expired or missing. Get current leases in order before you apply. Many borrowers wait until the lender asks, and that is when the delay starts.
Costs and Break-Even
A new loan means new closing costs. The question is whether the refinance pays for itself in stability, not just in savings. Here are the cost layers to count:
- Lender and broker fees for the new loan
- Appraisal and title charges
- Any prepayment charge on the old note
- Payoff interest and exit fees
Divide the total cost by any monthly savings to find the break-even. Often there are no savings at all. A fixed DSCR loan can have a higher payment than an interest-only balloon. In that case you are buying certainty. You are paying to remove the maturity cliff.
If the numbers leave the property cash-negative, consider selling instead. A forced refinance that bleeds every month can be worse than a clean exit.
Go, Wait, or Don’t
| Option | Fits when |
|---|---|
| Refinance now | Rent covers the new payment and value is solid |
| Wait | Seasoning or a lease issue needs time |
| Extend | The balloon lender agrees and the cost is modest |
| Sell | Coverage fails and equity is real |
| Pay down | A smaller loan clears the leverage cap |
Do not swap into another balloon. Before you sign, confirm the new loan is fully amortizing with no maturity cliff. The spine of our network is the 30-year fixed. Interest-only periods and ARM structures also exist through select lenders, and an interest-only period eventually ends in higher payments. Know exactly which structure you are signing.
Scale matters too. Loans above $2,500,000 are generally held to 30-year fixed structures in the network. Loan sizes run up to $3,000,000 on standard programs, with smaller balances routed through select lenders.
Manufactured homes, log homes, and barndominiums are not offered in these DSCR programs. If your balloon sits on one of those, this exit is not available.
For a W-2 investor weighing a bank balloon against a true 30-year fixed while scaling, Lendmire’s comparison of a bank balloon versus a true 30-year fixed covers that choice.
Key Terms Defined
- Balloon payment: a large lump sum due at the end of a loan after smaller regular payments.
- DSCR: the property’s rent divided by its full monthly payment.
- PITIA: principal, interest, taxes, insurance, and any HOA dues.
- Rate-and-term refinance: a new loan that replaces the old one without cash back.
- Cash-out refinance: a new loan larger than the payoff, with the extra paid to you.
- Seasoning: the waiting period between a purchase and a refinance.
- LTV: loan amount divided by appraised value.
Frequently Asked Questions
Can I refinance before the balloon is due?
Yes, and earlier is usually better. Starting six to nine months out gives you time for seasoning, an appraisal, and a second attempt. Check the old note first for a prepayment charge, because paying it off early can trigger one.
Does my old balloon payment count against my DSCR?
No. The new loan’s PITIA sets the ratio. The old payment disappears at payoff. What matters is whether the property’s rent covers the new, fully amortizing payment.
Can I take cash out while paying off the balloon?
Yes, but it becomes a cash-out refinance. That means a lower leverage cap, about 75% LTV on standard investment property, and seasoning rules apply, with about 6 months common. Even a small amount over the payoff plus costs can reclassify the file. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
What if the appraisal comes in low?
The loan amount shrinks with the value. You may need to bring cash to closing, pay down the balance, or ask the balloon lender for an extension. That is why a second option before maturity matters.
Can an LLC-owned rental use this?
Often yes, depending on program guidelines. Expect to provide entity documents, and the guarantor’s credit and reserves are reviewed. The property must be an investment property, not a primary residence.
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Tax treatment varies; consult a qualified professional.
About Lendmire
Lendmire — NMLS# 2371349 — is a DSCR and non-QM mortgage brokerage with investor loan programs in 41 markets, including Washington, D.C. DSCR eligibility is commonly reviewed by the lender around property-level rent rather than personal income documentation, subject to lender guidelines, and the brokerage helps arrange financing for LLC-owned portfolios beyond conventional financed-property limits. Recognized by Scotsman Guide as a Top Mortgage Workplace in 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. CFPB
2. Cornell LII Wex – balloon mortgage
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Is a DSCR Loan Worth It Over a Conventional Loan on a Rental? · Does a DSCR Loan Need a 1007 Rent Schedule? · Can You Get a DSCR Loan on a Surfside Beach Rental?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.