You need a 35-year, fixed-rate mortgage to buy a new home for $245,000. Your mor

Question

You need a 35-year, fixed-rate mortgage to buy a new home for $245,000. Your mortgage bank will lend you the money at a 5.40 percent APR for this 420-month loan. However, you can afford monthly payments of only $850, 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 $850? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

You need a 35-year, fixed-rate mortgage to buy a new home for $245,000. Your mortgage bank will lend you the money at a 5.40 percent APR for this 420-month loan. However, you can afford monthly payments of only $850, 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

Hi,

Please find the answer as follows:

You need to calculate the Value of Loan after 35 Years:

Nper = 420 (indicates the period over which payments are made)

Rate = 5.40%/12 (indicates the monthly rate of interest)

PV = 245000 (indicates the value of loan)

PMT = 850 (indicates fixed payments including principal and interest)

FV = ? (indicates the future value of loan)

Future Value of Loan = FV(Rate,Nper,PMT,PV) = FV(5.40%/12,420,850,-245000) = 558737.61

Since, payments of only 850 can be made per month, total amount that would get paid after 35 Years = 850*420 = 357000

Balloon Payment = Future Value of Loan - Total Payments = 558737.61 - 357000 = 201737.61

Thanks.

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