Possible to refinance balloon payment early?

[Jason Kim]

For example, lets say the original bank loan has the balloon payment due in one year from today.

Would it be possible or prudent in some cases to refinance the loan immediately rather then wait for the balloon payment date to arrive? 

[Tim Milazzo]

Hi Jason,

 The prepayment penalty for a given commercial loan is typically negotiated at the front end. That said, here are some typical structures:

- "Yield Maintenance" - when you prepay, the lender calculates the net present value of the interest they would have received of you held the loan to maturity, maintaining their yield/profit from the loan.

- "Declining" - the lender agrees to a simple schedule of prepayment penalties, often stated year by year. So for a 5 year loan, the schedule might be 5,4,3,2,1, with a few months at the end of the loan where there is no penalty.

- "Lockout" - it's impossible to prepay. This would more commonly be a period early in the loan, rather than the whole term.

- No penalty - there are lenders out there with good rates and no prepay penalties as well.

There's also "Defeasance" which is used to prepay a CMBS loan, but explaining that one would be a longer subject.