Example 2 - Mortgage with balloon payment

Suppose you have taken out a 30-year, $150,000 house mortgage at 6.5% annual interest. You expect to sell the house in 10 years, repaying the loan in a balloon payment. Find the size of the balloon payment -- the value of the mortgage after 10 years of payment.

Solution. The following cash flow diagram illustrates the case of the mortgage with balloon payment:

l%YR = 6.5

PV = $150,000 N = 30 x 12 = 360 (for PMT)

N = 10 x 12 = 120 (for balloon payment) P/YR = 12; End mode

 

 

 

 

 

 

 

 

 

1

 

2

 

 

 

59

60

 

 

PMT = ?

 

 

 

 

 

 

 

 

 

 

 

 

 

Balloon payment,

 

 

 

 

 

 

 

FV = ?

•Start the Finance Solver, selecting P/YR = 12 and End payment option.

•Enter the known TVM variables as shown in the diagram above. Your input form, for calculating monthly payments for the 30-yr mortgage, should look as follows:

•Highlighting the PMT field, press the soft menu key to obtain a payment of -948.10 (i.e., PMT = -$948.10)

•To determine the balloon payment or future value (FV) for the mortgage after 10 years, use N = 120,

highlight the FV field, and press the soft menu key. The resulting value is FV = -$127,164.19. The negative value indicates a payment from the homeowner. Check that the required balloon payments at the end of 20 years (N=240) and 25 years (N = 300) are -$83,497.92 and -$48,456.24, respectively.

10-6

Using the Finance Solver