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.

12-6

Using the Finance Solver