You need a 35-year, fixed-rate mortgage to buy a new home for $310,000. Your mor

Question

You need a 35-year, fixed-rate mortgage to buy a new home for $310,000. Your mortgage bank will lend you the money at an APR of 6.05 percent for this 420-month loan. However, you can afford monthly payments of only $1,500, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.

How large will this balloon payment have to be for you to keep your monthly payments at $1,500?

You need a 35-year, fixed-rate mortgage to buy a new home for $310,000. Your mortgage bank will lend you the money at an APR of 6.05 percent for this 420-month loan. However, you can afford monthly payments of only $1,500, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.

Explanation / Answer

Present value = ( Monthly payment *PVAF@.5042%,420 years) +present value of Balloon payment

310,000 = (1500 * 174.3523)   +   X

X(present value of single payment ) = 310,000 - 261,528.45

                                                   = $ 48471.55

SIngle balloon payment = Present value *FVF@.52% ,420 months

                                  = 48,471.55 * 8.26739

                                 = $ 400,733.20 (approx 400,000 )

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