Question

45. BALLOON PAYMENT MORTGAGES Emilio is securing a 7-year balloon mortgage for $280,000 to finance the purchase of his first home. The monthly payments are based on a 30-year amortization. If the prevailing interest rate is 4.5%/year compounded monthly, what will be Emilio's monthly payment? What will be his balloon payment at the end of 7 years?

Answer 1

Follow the steps given below to compute the balloon payment at th end of the seventh year:

Step1: Compute the amount of all the installments before the last installmenton the basis of 30 year loan period:

В 1 Particulars Amount 280000 2 Loan amount 3 Term of loan 30 4 Rate of interest per period 4.5%/12 Number of installments B3*12 5 =PMT(B4,B5,B2,0) Amount of installments 6

The result will be as follows

A В 1 Particulars Amount 2 Loan amount 280000 3 Term of loan 30 Rate of interest per period 4 0.00375 Number of installments 5 360 6 Amount of installments ($1,418.72)

Step 2: Compute the ballon payment by first calculating the prsent value of 29 installments and then subtract this amount from the amount of loan.

The ballon payment will be equal to the future value of the remaining mount.

Solve as follows:

1 Particulars Amount 280000 2 Loan amount 3 Term of loan 30 -4.5%/12 4 Rate of interest per period 5 Number of installments 6 Amount of installments B3*12 =PMT(B4,B5,B2,0) 7 1418.72 8 Installment amount - (12*7)-1 -4.5%/12 -PV(B10,B9,B8,0) 9 Number of installmets before the last 10 Rate of interest 11 Present Value of installments paid before last 12 13 14 15 Present value of loan outstanding after 83 payments B2-B11 16 Number of payments 17 Amount of balloon payment - 12*7 =FV(B10,B16,0, B15) 10

A. B 1 Particulars Amount 2 Loan amount 280000 3 Term of loan 30 4 Rate of interest per period 0.00375 Number of installments 5 360 ($1,418.72) Amount of installments 6 7 8 Installment amount 9 Number of installmets before the last 10 Rate of interest $1,418.72 83 0.00375 $101,029.03 11 Present Value of installments paid before last 12 13 14 15 Present value of loan outstanding after 83 payments 16 Number of payments $178,970.97 84 ($245,092.20) 17 Amount of balloon payment