Question

You have just arranged for a $1,720,000 mortgage to finance the purchase of a large tract of land. The mortgage has an APR of 7.2 percent, and it calls for monthly payments over the next 30 years. However, the loan has an eight-year balloon payment, meaning that the loan must be paid off then. How big will the balloon payment be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The monthly payments with a balloon payment loan are calculated assuming a longer amortization schedule, in this case, 30 years. The payments based on a 30-year repayment schedule would be:

PVA = $1,720,000 = C({1 – [1 / (1 + 0.072/12)³⁶⁰]} / (0.072/12))

C = $11,675.16

Now, at Time = 8, we need to find the PV of the payments which have not been made. The balloon payment will be:

PVA = $11,675.16({1 – [1 / (1 + 0.072/12)¹²⁽²²⁾]} / (0.072/12))

PVA = $1,544,767.00